By NBF News
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The Central Bank of Nigeria (CBN) has been urged to adopt a more accommodative monetary policy as the recent raise of its Monetary Policy Rate (MPR) by 275 basis points is capable of stiffling the private sector of the much-needed funds for growth.

According to Afrinvest West Africa Ltd, an equity and investment outfit, credit to the private sector has shown a strong negative correlation with benchmark rates in recent history.

It opines: 'We think the CBN's reliance on a healthier banking system, following the conclusion of banking reforms, may not be a sufficient condition to offset the liquidity tightening effect of the hike in the MPR. We observe that credit to the private sector has shown a strong negative correlation with benchmark rates in recent history, even in the pre-crisis era. We opine that the sharp rise in the MPR could stifle credit growth to the private sector. We therefore expect the CBN to revert to a more accommodative monetary policy stance in the short to medium term.'

In one of the most drastic adjustments to the benchmark rate seen in recent history, the CBN raised the MPR from 9.25 per cent to 12 per cent, while maintaining the asymmetric corridor around the MPR at +/-200basis points.

The CBN acknowledged that this hike in MPR runs the risk of higher financing costs on the system and could potentially lead to a slowdown in credit growth.

It would be recalled that at an extraordinary Monetary Policy Committee (MPC) meeting held on October 10, the CBN zeroed in on reversing the downward trend in the value of the Naira. Prior to the MPC meeting, forex demand at the official window had spiked to an all time high as speculative activities occasioned by system liquidity and expectations of a devaluation in the Naira exerted demand pressure on the Dollar. In arriving at its decisions, the key concerns for the Committee were the bleak global economic outlook, fiscal induced liquidity and its attendant demand pressure on foreign exchange, the genuineness of rising forex demand, as well as declining external reserves.

Other decisions taken by the MPC include the jack up of the Cash Reserve Requirement (CRR) to 8 per cent from 4 per cent; a decrease in Net Open Position of banks from 5 per cent to 1 per cent and the reversal of Reserve Averaging

'The increase in the CRR is a direct measure aimed at reducing the liquidity position of banks, which should inevitably serve as a restriction on credit creation by the banks. By limiting the cash position of banks, the CBN expects to curtail the liquidity induced Dollar demand. On the flip side, we expect loanable funds to be reduced proportionately,' the company said.

It also notes that the foreign exchange exposure of banks will be significantly reduced as banks are now required to keep their net open positions at a maximum of 1 per cent of shareholders funds.

'The effect of this is a reduction in the foreign exchange speculative activities of banks which should further support the Naira. Prior to the new regulations, we estimate that Nigerian banks held between US$400million to

US$700million in aggregate net open position.The CBN also effected to a continuous maintenance of the CRR, as opposed to allowing banks maintain an average minimum CRR of 4 per cent within four to five weeks. We expect this policy to engender some short term volatility in interbank rates while continuously stemming system liquidity.

Overall, we share the CBN's view that there are clear threats to the Naira and external

reserves. We believe it is particularly more imperative to defend the Naira and reverse

plummeting external reserves position in the light of unfavourable global economic outlook and oil prices. However, we observe that MPR adjustments have shown limited effectiveness in tempering exchange rate movements in Nigeria as depicted in figure 2 below. Hence, we are of the view that the rather direct adjustment to banks' balance sheets (reviews of CRR, net open position and reserve averaging) will prove more potent in defending the currency,' the company stated.