Excess liquidity: Banks to keep 50% of public sector deposit as cash

By The Citizen

The Central Bank of Nigeria (CBN) yesterday, further reduced the amount of money in the economy by directing banks to keep 50 per cent of public sector deposits as Cash Reserve Requirement (CRR).

The apex bank took this decision at the end of its Monetary Policy Committee (MPC) meeting in Abuja.

The Governor of the CBN, Mallam Sanusi Lamido Sanusi, said the 50 per cent CRR 'applies to all federal, states and local government deposits on the balance sheet of deposits money banks.'

The CRR represents portion of deposits that banks must keep as cash and hence cannot be used for lending. By increasing CRR on public sector deposits, the apex bank has reduced the amount of money banks can lend, and thus reduce money supply in the economy.

Sanusi also said the CRR on private sector deposits remained at 12 per cent. The Monetary Policy Rate was also retained at 12 per cent, with a corridor of +/- 200 basis points.

Defending the decision of the MPC to tighten money supply by retaining the MPR at 12 per cent, and raising CRR on public sector deposits, Sanusi said the decision was aimed at curbing excess liquidity in the banking system.

He said: 'The committee observed the build-up in excess liquidity in the banking system, and expressed concern over the rising cost of liquidity management as well as the sluggish growth in private sector credit, which was traced to deposit money banks, DMB's, appetite for government securities.

'As election is coming up, the government will be having a lot of financial spending during the period. I have said it before that there is likelihood for the rate to go up than going down in the immediate future'.

'The fiscal spending of the government is just the problem, the deficit in the first half of this year is over 400 billion dollars compared to 200 billion dollars during same period last year. We have drawn over 700 billion dollars from the excess crude account at a time when the government is borrowing more and saving less. You don't expect monetary authority to lower the rate of interest.

'The committee expressed strong concerns about the risks posed to government revenues from oil theft, less than expected production, new discoveries of shale oil, the fast increasing number of African oil exporters, the dwindling market for Nigerian crude as well as the inevitability of a fall in global oil prices as well as capital flow reversal, which may impact the current global (dollar) carry trade, for which Nigeria has been a major beneficiary.