MPC's call for unconventional policy tools on CRR


Tuesday, January 05, 2015 08:42 AM / FBNQuest Research 


The communiqué at the end of the meeting of the monetary policy committee (MPC) in late November regretted that the reduction in banks’ cash reserve requirement (CRR) two months previously from 31% to 25% had only benefited borrowers in sectors with low employment elasticity.


It therefore instructed the CBN management to devise regulations and measures to ensure that the subsequent cut in the CRR of five percentage points (to 20%) reached employment generating sectors such as agriculture, infrastructure, solid minerals and industry. This is the message from the latest personal statements of MPC members.


Monetary policy in Nigeria was successful in delivering macroeconomic stability until about Q3 2014, the consensus runs, although its impact on job creation was negligible at best. It was then undermined by the latest global headwinds, principally the collapse in the oil price.


One member notes that the prime lending rate stood at about 17% and the retail rate for SMEs at 27%. Since he estimates the internal rate of return for large and small businesses at 20% and 15% respectively, it becomes clear why borrowers are struggling. He also cites data showing that private-sector credit extension had expanded by only 3.5% ytd by end-October, and therefore far short of the target for the year of 26%.  


The consensus therefore argues for cuts in the monetary policy rate (MPR) and the CRR to reverse a trend decline in GDP growth. (One member notes that more than 50% of banks’ deposits mobilised were not available for intermediation/on-lending before the latest reduction in the CRR.) Because of the committee’s long-standing suspicion of the DMBs, it voted for a new asymmetric corridor of +2%/-7% either side of the new MPR of 11%.


For the same reason, the consensus of statements makes the reduction in the CRR “conditional”. The statements use different formulae to express a similar message. One refers to aggressive quantitative easing, a second calls for targeted lending and two more advocate the deployment of unconventional monetary policy tools. Another envisages a rebate mechanism whereby the DMBs appear to benefit from the reduction in the CRR after they have disbursed to favoured sectors. 


A dissenting voice quotes figures in the CBN’s banking stability report showing that gross lending increased by just N39bn after the net injection of about N400bn resulting from the cut in the CRR in September.


The statements (with one exception) mention exchange-rate policy only to comment upon its stability due to the tapping of fx from autonomous sources, the CBN’s administrative measures and its use of “moral suasion”.

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