Analysts disagree with CBN 50 per cent Cash Reserves Requirement (50% CRR) – Globasure News Updates.

Financial analysts have disagreed with the Central Bank of Nigeria over the imposition of 50 per cent Cash Reserves Requirement on all government deposits with commercial banks.

They said the introduction of such additional instrument by the Monetary Policy Committee, which ended a two-day meeting in Abuja on Tuesday, would be ‘counterproductive.’

CRR is the amount of cash that banks have to keep with the central bank and is used to drain out excessive money from the system.

According to the analysts, the application of the 50 per cent CRR will not guarantee reduced pressure on both the exchange rate and inflation rate as a result of the increased government spending.

They argued that the introduction of the 50 per cent CRR would necessitate further action by the central bank if the economy would be kept stable.

The CBN had on Tuesday expressed concern over the excess liquidity in the balance sheets of Deposit Money Banks, and concluded to apply 50 per cent CRR to all government deposits with commercial banks.

The decision, which was announced by the Governor, CBN, Mr. Lamido Sanusi, was taken at the MPC meeting held at the central bank’s headquarters in Abuja.

Sanusi said the introduction of the 50 per cent CRR to public sector funds became imperative in order to further tighten liquidity owing to increased spending in preparation for the 2015 elections.

Sanusi noted that about N1.3tn of public sector deposits was currently with commercial banks, adding that such huge funds posed a risk to the current liquidity condition.

But a professor of Economics at the Ekiti State University, Dr. Abel Awe, said the policy would not be capable of reducing the volume of money in circulation, adding that a huge amount was currently being stacked outside the banking system by politicians in preparation for the 2015 elections.

He said, “The use of government spending and taxation should be employed in the right mix to reinforce the CBN’s monetary policy. We should expand our productive levels across various sectors to strengthen the value of the naira and the exchange rate.”

The Chief Executive Officer, Economics Associates, Dr. Ayo Teriba, said the introduction of the 50 per cent CRR at the level of the MPC was improper, arguing that such monetary measure should not have been taken by the committee.

According to him, the use of an additional instrument like the CRR is part of the supervisory role of the CBN, and not at the level of the MPC.

Teriba said, “MPC, all over the world, focuses on the interest rate. The Bank of England’s MPC has been meeting every month for the past 15 years. The BoE has never announced the introduction of another instrument. In September 2010, the CBN started the MPC. It has been focusing on three instruments. The application of CRR means it has added a fourth instrument.

“Monetary policy management is different from banking supervision. The committee should focus on macro-economics for the management of the monetary policy. CBN is also in charge of banking supervision in Nigeria unlike the United Kingdom where the Financial Service is in charge. The CBN should have done the 50 per cent CRR at another level.”

Another analyst and a director at DLM Securities, Mr. Idowu Ogedengbe, who said the 50 per cent CRR was meant to reduce the banks’ assets, noted that the development might force banks to explore consumer and small and medium scale enterprises lending in order to retain their profitability.

He said the policy might be counterproductive and reduce banks’ profitability, adding this might force banks to lay off workers due to reduced profitability.