In a bid to reduce pressure on the naira and maintain macro-economic stability, the Central Bank of Nigeria’s Monetary Policy Committee may increase the Cash Reserve Requirement of public sector funds in the vaults of banks to 100 per cent from the current75 per cent.
The implication of this is that the central bank will withdraw the entire N4tn public sector deposits in the banking system.
The Governor, CBN, Mr. Lamido Sanusi, said the MPC had limited options to maintain stability in the face of dwindling oil revenue caused by leakages.
Sanusi, who was the guest speaker at the Udo Udoma & Belo-Osagie 30th anniversary lecture in Lagos on Wednesday, said he had even voted that the private sector CRR be also raised to 15 per cent during the January MPC meeting, when the public sector equivalent was raised from 50 to 75 per cent.
The CBN boss said the economy needed such tightening measures to maintain price stability, especially a stable exchange rate, since the country was import-dependent.
He said, “The public sector CRR is 75 per cent. We will probably move to 100 per cent. If you look at the statement of the last MPC meeting, you will see that I was in the minority. I was outvoted. I wanted to increase the private sector CRR to 15 per cent because I think monetary policy conditions are not tight enough.
“And what has happened since then has proved me right because the naira is under pressure. I still feel we should have gone up to 15 per cent of private sector CRR and 100 per cent of the public sector CRR. And we have to. There will be costs, but the costs of not doing it are much higher.”
Some analysts had said there was a need to also raise the private sector CRR because the naira was under pressure.
Raising the private sector CRR to 15 per cent means the central bank will increase the amount of private sector funds it has sterilised from N1.8tn to N2.3tn, out of the N11.7tn total private sector deposits in the banking system.
The central bank governor said the macroeconomic stability the nation had achieved over the years could be lost if not well guarded.
According to him, out of the $42bn in the country’s external reserves currently, about $20bn is portfolio money that can disappear in the event of any shock.
Sanusi said, “Today, the biggest problem we have from the macro perspective is the threat to the exchange rate at a time when oil prices are in excess of $110; when we have a current account surplus and when the exchange rate should not be a problem. In a normal situation, I should be resisting an appreciation of the currency today, not fighting depreciation. We are having a problem that is entirely home-grown.
“People are literally taking crude oil physically and refining it; we have satellite pictures, you can identify every refinery that is there. You could bomb them in one day if you wanted; people are driving and taking the fuel out in vessels and not paying for it, plus all the leakages of the official sector.
“So, without a collapse in oil prices and without a major increase in government spending, our Excess Crude Oil Account collapsed from $11.5bn to $2.5bn in one year.”
He further said, “And the world is watching. The guy sitting in London and putting his money in the Nigerian capital market is watching and saying you know what, this country will not be able to defend its currency. All it takes is for four people to panic. The markets are irrational.
“You look at how some emerging markets’ currencies are falling. This stability we have built for five years can unravel overnight. We cannot take this stability for granted. It is very fragile and the way to keep it is to put in those controls: stop the theft, stop the leakages, build the reserves and then we can have lower interest rates and low inflation. We have to attack the root of the problem.”
The CBN governor further underscored the importance of a stable naira, adding that stable exchange rate would help better the life of the common man.
According to him, majority of the masses buy imported food in the market rather than borrow money from the banks at higher interest rates.
Sanusi said, “People talk about external competitiveness of Nigeria and I ask a simple question that in what way does the devaluation of the naira improve the economy? If the naira becomes N200 to a dollar, does that increase the quantity of oil that we sell? It is a commodity denominated in dollars. The price and the demand have no bearing at all with the exchange rate of the currency.
“Or do we import less petroleum products or foods? The elasticity of demand is so low that all that devaluation does is that it increases the cost of imports – the cost of raw materials, cost of energy and the foods we import and that pass on to inflation plus all the negative consequences; reversal of portfolio flows and non-performing loans of those institutions that borrow using foreign currencies.”
He added that the central bank was neither looking for a strong naira nor a weak one.
“We simply want a stable naira. We all know how instability affects the common man. How many of us borrow money from banks compared to the number that buy manufactured goods or imported goods like rice from the market? The rice is imported from may be Thailand or India,” Sanusi said.