The monetary policy committee (MPC) of the Central Bank of Nigeria (CBN) is obviously scared by the signs of cracks on the walls of Nigeria’s economy. The writing on the wall is that Africa’s largest economy is heading for recession. Last week the MPC responded to the brewing recession with a monetary policy equivalent of shock-treatment.
It deployed measure it has not used in the last six years. It relaxed CBN’s merciless grip on liquidity by ordering cuts in monetary policy rate (MPR) and cash reserve ratio (CRR).
The cuts could inject N771 billion in loanable funds into the economy.
The MPR, the rate at which the apex bank lends to deposit money banks, was reduced by two percentage points from 13 to 11 per cent. The CRR went down by five per cent. It now stands at 20 per cent. The MPC is easing liquidity squeeze in the face of rising inflation. Inflation rate had been inching up consistently in the last few months. It only stabilized momentarily in October.
The downward review of CRR might inject at least N771 billion into the system for lending to key sectors of the economy that could create jobs, stimulate economic growth and stem the brewing recession. The two per cent cut in MPR is expected to drive down the cost of funds. Cost of funds for high risk sectors like the small and medium enterprises (SMEs) which has the highest potential for creating jobs, had surged to 35 per cent during the liquidity squeeze.
However, in an economy where 60 per cent of the cash in circulation is outside the banking system, there are doubts about the chances of the high stake gamble by the MPC attaining its multiple goals of encouraging lending, reducing the cost of funds, stimulating job creation and economic growth in the face of rising inflation. Nigerian banks have a penchant for moving interest rates in one direction.
They only go up and hardly come down. Since the announcement of the naira rain, only loan beneficiaries that have complained to their creditor-banks are being considered for downward review of interest rates. If the MPC had hiked lending rates, all loan beneficiaries would have been automatically notified of the increase.
Lending rates might ultimately climb down. However, few expect the new measures to stimulate the advancement of loans to the private sector. The federal government is still very active in the money market borrowing voluptuously with its risk-free instruments. It is very likely to crowd out the private sector in the money market as it mops up available funds.
Besides, with the mounting loans default in the private sector, not even the CBN itself would encourage banks to create new risks. The apex bank is still groaning under the weight of the N5 trillion banks bail out of 2009 and would not risk a similar venture by nudging banks into reckless lending.
With the sharp decline in oil prices the apex bank even ordered banks to reduce their exposure to the oil industry as many firms have defaulted in dollar-denominated loans obtained when oil price hovered around $115 per barrel.
The loans were obtained at an exchange rate of N160 to the dollar but are now to be paid back at N200 to the dollar. Meanwhile, as widely expected, the naira has become the first casualty of the MPC’s decision to relax the liquidity squeeze. The naira tumbled in the parallel market from N235 to N245 to the dollar.
With huge stacks of idle naira being freed to chase scarce dollars, there are fears that the naira might be heading for N250 to the dollar in the parallel market. From all indications, the MPC has finally accepted the basic reality that economic growth is often attained when inflation rate is allowed to climb by a few notches. By lowering lending rates, the MPC expects the naira to depreciate further as banks bombard the forex market with the huge liquidity freed by lower MPR and CRR.
The danger in the MPC’s decision to ease CBN’s merciless grip on liquidity is that if steps are not taken to channel the funds to segments of the private sector that would create jobs and stimulate growth, the policy might end up weakening the naira and setting inflation rate spiraling out of control. For obvious reasons, banks loath the idea of lending to SMEs which are perceived as high risk borrowers. But the SMEs remain the engine of growth in the economy.
They create jobs faster than multinationals and other big firms. However, banks’ perception of SMEs as high risk fund users is an established fact. Most of the SMEs are awful in book keeping. Besides, they do not have collaterals for the loans they critically need. And in an era of high loans default in the banking system, no one could dismiss the banks’ fears with a wave of the hand.
The federal government must therefore work out a system that would ensure the flow of funds at affordable rates to SMEs and other segments of the private sector that would create jobs, stimulate economic growth and steer Nigeria from the brewing economic recession.
