The confusion surrounding last week’s decision by the Central Bank of Nigeria’s (CBN) rate-setting committee (the Monetary Policy Committee — MPC) to harmonise the cash reserve requirement (CRR) for banks was as much a question of the paucity of timely data on the industry, as it was a difficulty with discerning the CBN’s policy intent.
First, the data challenge. Much of the publicly available data on the banking industry’s balance sheet is as old as January this year. As at that date, apparently, the mix of public sector deposits and private sector deposits on the industry’s balance sheet was in a ratio of 60:40. On this measure, the MPC’s decision, by paring down the reserve requirement on public sector deposits (from 75% to 31%) by more than it raised that for private sector deposits (from 20% to 31%) would have freed up more cash for banks to lend (or salt away in high yielding government debt instruments).
Picking through the back-of-the-envelope calculations with which the desks of most banking industry watchers were littered in the immediate aftermath of the MPC’s decision on Tuesday, it was obvious that at a ratio of 20:80 for public sector deposits to private sector deposits, the MPC’s new reserve requirement was policy-neutral. With public sector deposits above this ratio (i.e. around 21%), monetary policy becomes more accommodating. Were the share of public sector deposits on banks’ balance sheets to reach 15% of total deposits, then the new policy would have the industry return money to the CBN.
In the end, it turned out that the public sector’s share of the banking industry’s deposit base was slightly under 10% as at the time of the MPC’s decision. In essence, therefore, the MPC had, by this rate harmonisation, tightened monetary conditions. By forcing banks to keep with the CBN a larger portion of every naira the industry raises as deposits, the MPC thus compels banks’ to seek to earn more per every naira deployed (as loans). Inevitably, domestic borrowing costs would go up as banks try to sweat what remains of their deposits after the CBN has had a go at their punch bowls.
Given the MPC’s concern with “creeping headline inflation since January 2015″, driving borrowing costs higher would make sense, if the intent was to choke off the surplus liquidity that might be driving prices up. However, the MPC did note that the factors behind rising domestic prices since this year began “were largely transient and outside the purview of monetary policy”.
So, the harmonisation did not have domestic prices in its sights. Indeed, while observing that the “current discriminatory CRR on public and private sector deposits has not only constrained the policy space but could inspire moral hazard by private market participants”, the MPC defended the harmonisation in terms of a need “to curb abuses and improve the efficacy of monetary policy”.
At this point, the challenge with understanding the apex bank’s policy direction pokes its head through the window. The MPC’s point about the unintended consequences of the discriminatory CRR policy draws attention to the rigour (or lack thereof) of the MPC’s policy response function. With the CBN’s most visible policy agency only apparently vaguely aware of the upshots of its policy prescriptions, what assurances are there that current policy directions would be alive to tomorrow’s challenges?
Arguably, the biggest of the tasks facing the apex bank in the near-term is, in the MPC’s words, that of protecting “the reserve buffer to safeguard the value of the domestic currency and engender overall stability of the banking system”. Unfortunately, the MPC’s response to this is to open a window at the back of the house, through which it tries to sneak out, by arguing that “monetary policy is gradually approaching the limits of tightening and would, therefore, require complementary fiscal and structural policies”.
Our main domestic economic challenge, right now, is to make it more attractive for both residents and non-residents to hold naira-denominated assets. While proper reforms of the public expenditure management system and of the structure of the Nigerian state are germane to this task, their implementation horizon is much longer. Far much easier, then, to let the naira float, while simultaneously putting up the CBN’s policy rate. Admittedly, this would constrain economic growth at a point when all out growth is what the economy most lacks. But this is to cavil, in short, to argue against medication because of the nauseous after-effects.
As a policy option, this prescription, minor objections aside, is well within the realms of monetary policy, but way beyond the CBN’s governor’s pledge, in his first address on assuming office, to keep domestic rates down!