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Foreign reserves now $33 billion
TO rein in inflation and achieve price stability in the country, the Central Bank of Nigeria (CBN) yesterday raised the cost of lending by 25 per cent basis point, from 6.25 per cent to 6.50 per cent.

Also the cash reserve ratio was increased by 100 per cent from one per cent to two per cent while the liquidity ratio was reviewed upward by 500 basis points.

While the lending rate is with immediate effect, the cash reserve and the liquidity ratios are to come into effect in February and March in that order.

The implication of raising the Monetary Policy Rate (MPR), the rate at which the apex bank lends money to commercial banks as well as the cash reserve ratio and the liquidity ratio means high cost of borrowing to potential fund seekers.

With the development, commercial banks are free to mark up their borrowing benchmark as they are expected to shut down funds available for lending through the raising of the cash and liquidity ratios that they must maintain.

At the end of the Monetary Policy Committee (MPC) meeting, CBN Governor Sanusi Lamido Sanusi, said the decision, which was taken by majority of the members, is to check the rise in inflationary trend, particularly in an election year where politicians will be spending excessively on campaigns.

He said the year-on-year headline inflation, as measured by the percentage change in the all-items on the Consumer Price Index (CPI), November 2009 trended downwards during most periods of 2010. It declined to 11.8 per cent in December 2010 from 13.6 per cent in September.

Similarly, core inflation declined to 10.9 per cent in December 2010 from 12.8 per cent in September. Food inflation also dropped to 12.7 per cent in December 2010 from 14.6 per cent recorded in September.

Sanusi, however, advised the Federal Government to remove the subsidy on petroleum products, and instead implement the reforms in the downstream sector of the petroleum industry to begin products refining locally because petroleum importation to the country was dealing a big blow to the nation's finances.

The MPC statement read: 'The committee reaffirmed its conviction that a stable exchange rate regime is critical to maintaining price stability but noted that in the absence of complementary policies, the regime is only sustainable at the cost of significant attrition in foreign reserves. The MPC, therefore, continues to emphasise that the solution to reserve depletion lies in the implementation of appropriate reforms with regard to industrial and trade policies aimed at reducing import dependence, which are beyond the scope of monetary policy.

'Substantial foreign exchange is expended yearly on Joint Venture Contracts (JVC) cash calls and importation of petroleum products due to the delay in implementing much needed reforms in the oil sector. This is in addition to the huge amounts spent on petroleum subsidies, which are likely to increase with higher oil prices. The country is also expending foreign exchange on import of food items such as rice whereas what is needed is the implementation of policies that will lead to food security and total self- sufficiency.''

It said external reserves stood at $32.32 billion at end-December 2010 and rose to $33,26 billion as at January 20, 2011.

In the committee's view, implementation of these reforms along with the improved outlook for oil price and output should go a long way in reversing the negative trend in our foreign reserves position.''

Accordingly, the considerations of the MPC following from the above review suggest that 'while the general outlook on growth is highly favourable, it is important to be vigilant on prices and financial market developments. The likelihood of improved oil output and rising oil prices in the international market, would contribute to growth and help rebuild external reserves, which is vital to sustaining consumer and investor confidence in the economy.

'The MPC noted that the risk of inflation is on the upward side due to liquidity injections from the likely increase in government spending in the run up to the April elections, and AMCON purchases, as well as rising global energy and food prices and the expected pass-through to the domestic economy'.

The body noted that the existing subsidy regime on petroleum products is not sustainable in view of the Federal Government's current finances. In view of these factors, the committee noted that inflation remains a major concern that cannot be ignored in the short-to medium-term.

The MPC also noted with serious concern the existing low rates of about one per cent paid on savings deposits and its implications for financial intermediation and the mobilisation of long-term funds which is critical for enhancing investment in real sector economic activities, and hence, economic growth.

The panel felt that in preparation for the removal of the CBN guarantee of inter-bank market, banks need to provide reasonable incentives for the mobilisation of savings for growth and financial inclusion. It, however, stated its commitment to continuing to monitoring developments with a view to coming up with appropriate measures to address the issue.

'With regard to external reserves, the committee observed that the fundamental structural problem of the country as an import-dependent economy was largely responsible for the continuing depletion of the external reserves. The continuing decline in reserves was accounted for by the payment for JVC cash calls, amounting to $6,867 million and $5,657 million in 2009, funding of the foreign exchange market to the tune of $24,835.65 million as against $25,070 million in 2009 in the case of WDAS. Sales to BDCs amounting to $5,337 million in 2010 compared with $4,734 million in 2009, in addition to the payment of subsidies on petroleum product as well as other government external payment obligations.

The committee stressed that a significant portion of the foreign exchange outflow will be stemmed with the Petroleum Industry Bill because JVC cash calls alone accounted for a large proportion of the total net outflow in 2010.