CBN Executive Order to Banks, the Implications on Bank Customers and Economy – Dr Kazeem Bello

Dr Kazeem Bello is a policy analyst and economist of International repute. He gave his analysis on Nigerian-Canadian Business Forum on Wednesday.

Let me attempt to interpret or explain the Executive Order being ditched out to the Banks by the CBN Governor as one of the outcomes of the monthly MPC meeting. CRR is Cash Reserve Ratio. It is a symbiotic instrument or tool used by most Central Banks to help regulate and adjudicate the monetary policy platform to suit the Stakeholders in the Financial Markets.

In fact, it is from the CBN that I am learning for the first time that such an EO can be issued directly to the Banks in other to adjust the CRR for certain economic purposes in the way it has been emphasized by the Governor with stern warnings and threats. I will explain that in a minute. The Stakeholders that typically get affected by the movement of the CRR by Central Banks are the Banks, the Capital market operators, major cash platform financial institutions, and the Government.

What the CBN does from time to time or periodically is to tune the CRR based on the financial circumstances of the economy or essentially to assist any of the Stakeholders listed above to get a cushion or relief or palliative that is inhibiting their financial strength. It is a big monetary policy instrument used by Central Banks. It is one such instrument classified by Experts as a a standby financial instrument to finetune the dictate and direction of the Central Bank’s monetary policy or the Government.

In general, when CBN wants to reduce cash liquidity from the economy based on the policy dictation of the Government to invoke either a tightening of the policy or easement of the policy ( expansionary or contractionary policies), one important tool used is the CRR.

When the CRR goes up, it ultimately limits the cash available to the Banks to carry out their Treasury trading, advance loans, and apply cash to other related transactions, including demand deposit restrictions or purchases Forex. The sums of the current Account balances of the Banks up to the CRR level, as he had mentioned 3 times in a recent Press briefing, is cash belonging to the Banks but are technically deposited with the Central Bank to control the money supply in the system notably (M1 and M2).

The CBN pays some little interest on it, but it is never available to the Banks to do anything, including buying forex, as he stated. This way, the Banks are strangulated of cash as the CBN mops up what is regarded as excess liquidity in the market using the CRR. It is actually a veritable instrument used for adjusting and taming inflation and reducing or increasing the level of liquidity.

On the other hand, the CBN can use the instrument to help reflate the economy when it is realized that there are liquidity pressures in the economy. During the Covid pandemic, when the global economy witnessed a serious liquidity crunch as a result of drops in trades and lockdowns, most Central Banks around the world dropped the CRR, including our CBN, to help Banks to increase lending to the economy to battle the stagflation created by the pandemic. So it could go either way depending on the direction and dictate of the economy.

The same goes for capital market liquidity flows. It then becomes a presumption that the CRR can be used to assist the Government in its monetary policy direction. In this case, the CBN is attempting to help the FGN as a stakeholder by increasing the CRR hence enabling the Government to fight or address inflation through liquidity mop-up. At the same time, as stated earlier, it can be used to assist reflate the economy if it is dictated by the Government’s economic policy to enable Banks and the Capital market to have access to loanable funds to assist conduct an expansionary monetary policy of the Government.

That is what CRR essentially means and what it does, and for who. By increasing and enforcing the CRR, the CBN of Nigeria is assisting the FGN to mop up liquidity from the Banks in Nigeria or the money market. This will lead to a lower capacity to lend and also limited funds to actively trade within the Treasury market or money market.

There is currently not much in terms of using CRR to control liquidity in the capital market in Nigeria because the Nigerian Capital may not have reached that level of sophisticated operative mechanism. One of such is the ” Margin Calls” in the Capital markets Ecosystem. The depth of the Nigerian capital market capitalization is just too shallow and unattractive to the global players to have such visibility.

The last time margin calls were aggressively introduced in Nigeria between 1998 and 2009, it was a colossal disaster, and the market plunged on the weight of a visible lack of technical know-how, experienced market makers and practitioners, and very inordinate fraud perpetrated by the Stakeholders, especially the margin call players.

Several investors lost significant sums of money, and I am certain someone here on this platform may have fallen victim to that disastrous crash of the market as a result of those impracticable margin call operations in Nigeria. So, the CBN uses CRR technically to bully the Banks or sometimes help the Banks and vice versa.

Now let’s come to the question of what I personally suspected was the major reason for raising the CRR. The CBN actually cited inflation pressures, but you have to deeply understand the technicalities involved in defining the direction of the CRR to comprehend what the CBN is attempting to do, viz, the current predicament and circumstances of the Nigerian Economy.

My position on the way the CBN is attempting to address the inflationary pressure is that of a ” Policy Surmasults “. That’s what I called it two months ago when the CBN started it. I have addressed this in an earlier contribution. I insisted it is completely a wrong palliative to address inflation taking into cognizance of the fragile nature of the state and the health of the Nigerian Economy. It is counterproductive, and I am not sure how we are invoking policies that will further exacerbate the economic problems.

When the CBN started this antidote to fight inflation, inflation was 16.5 %, and today it is 22%, while the real inflation is well close to 30%. Inflation in Nigeria is projected to reach 30 % by year-end due to several factors, but largely due to current acute food shortages and energy costs. The exchange rate was N650 at that time, and today it is N720. The lending rate ( backend or effective borrowing rate) was an average of 28%, and today it is about 40%. ( borrow to do what, sell cocaine or drugs???.) The policy of a hike in interest rate will not work for Nigeria, and I am currently working on my postulations that the Nigerian Economy will surely slide into Recession by next year, especially in the face and threat of a slower global economic growth rate next year. Too bad for the incoming administration in Nigeria. When my position is ready, I ll publish it.

But we surely have solutions to implement to escape the Recession. We can actually avoid the Recession, but it is certainly not going to be under this current CBN administration. Hence, we are most likely going to see another Economic Recession in Nigeria.

What, then are the implications of raising the CRR by the CBN?

1. It will impact the liquidity level in the economy and create more dire problems for productivity as industries find it hard to raise capital( short or long) to operate. It means more pressure on inflation as good, including basic food items, becomes more scarce in the economy due to falling production capacities. Unemployment will rise, and consumer purchasing power shall be eroded, expanding Nigeria’s poverty index. Those are the first set consequences of such liquidity tightening in Nigeria.
2. It may expose the financial distresses of some Banks in Nigeria. There have been rumuors trending for a long time about the state of health of most Nigerian Banks. Essentially, a good number of them are moribund and struggling. Depending on the longevity of sustaining the CRR increase and liquidity mopping in the system, we may actually see some of those weak Banks being finally unveiled and exposed, resulting in distress and closure. I have to do an in-depth study on this, but tacitly, this is what may result from the liquidity mopping with CRR. We may see some distress in the Banking system.
3. My suspicion is that there is pressure on the side of the CBN to raise cash to expand and extend short-term lending to the FGN in the form of Ways and Means borrowing to fund the budget deficits in the face of dwindling Government revenue, increasing debt Servicing pressures and inability to raise money elsewhere. It is the sure bankers that the CBN will lend the excess liquidity mop-ups to expand W&M loans to the Government, which the Government badly needed.

I have covered this also in the past. The W&M borrowing at the beginning of this year was about N14 trillion. It is currently over N24 trillion, and the Government seems unavoidably left with no choice but to borrow to fund budget deficits.

The implication of this is that the CBN and Government will further hurt the economy because those W&Ms borrowing will go back to reflate the system, thus through a wrong and unproductive perspective. If this is the hiding intention of the CBN, then it is really sad and tainted policy surmasults. I hope this is not the intention here. Otherwise, it will lend credence to my prediction that Nigeria will surely slide into another Economic Recession come 2023 financial year.

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