Financial system’s liquidity averages N600b in eight weeks

A mix of reduced Cash Reserve Requirement (CRR) for banks and non-activity in the Open Market Operation (OMO) has bolstered liquidity in the system to an average of N600 billion in the last eight weeks.

The increased liquidity has, however, impacted on system’s credit level as the private sector and government have had a marginal rise in net obligation (measured month-on-month) by 0.5 per cent and 0.9 per cent as at September to N18.7 trillion and N2.8 trillion respectively.

During the period under review, the money market instruments- Open Buy Back and Overnight Rate reached year lows of 0.5 per cent and one per cent respectively due to high financial system liquidity.

At the last Monetary Policy Committee (MPC) meeting, members had favoured a reduction in the CRR for banks from 31 per cent to 27 per cent, in a move to reduce the strain faced by the lenders, following the full implementation of the Treasury Single Account, which eventually raised liquidity level.

But the development was bolstered as the apex bank halted its usual liquidity mop ups through the use of OMO auctions, supposedly a quiet monetary easing, to spur banks’ lending to the real sector.

However, assessed high level of excess reserves held by banks and increased domestic participation in the fixed income securities (as yields across all tenors fell to year lows), suggest that banks are still reluctant to lend to the real sector as they blame it on current macro-economic challenges.

Also, the capital market has not benefitted from the huge level of liquidity in the system as negative sentiments persist, mostly by foreign portfolio investors, driven by alleged foreign exchange uncertainties and poor results of corporates.

Meanwhile, as the MPC meeting resumes tomorrow, tough choices may be in the offing over concerns surrounding the foreign exchange rate, where has been characterised by mixed sentiments, with some calling for further devaluation of the local unit while condemning the calls.

There is also anxiety over slowing Gross Domestic Product (GDP) growth and unrelenting inflationary pressure, although both eased marginally in the latest reports; robust liquidity levels in the financial system, as well as the expected rate hike by the Federal Reserve Bank of United States’ in December and the consequences for emerging economies like Nigeria.

Inflation eased marginally to 9.3 percent in October, driven by the slower pace of growth in the food sub-index and the core index, which eased to 10.1 per cent and 8.7 per cent from 10.2 per cent and 8.9 per cent respectively, after creeping from seven per cent to 9.4 between January and September 2015.

The Nigerian Bureau of Statistics said GDP expanded to 2.8 per cent year-on-year to N18 trillion in the third quarter, 0.5 per cent higher than 2.4 percent recorded in the second quarter but 3.4 percent lower than 6.2 percent recorded a year earlier.

While the marginal improvement in the third quarter was riding on the back of increased oil production, non-oil GDP growth has continued to taper, declining to 3.1 per cent year-on-year with the manufacturing sector having contracted for three consecutive quarters.

A financial market analyst, Ayodeji Eboh, told The Guardian at the weekend that the committee is expected to deliberate on policy options that would stimulate the ebbing economic growth without creating further pressure on financial stability, but restore confidence in the market to attract private capital and shore up the external reserves.

“The committee would likely appraise the current liquidity boosting policy of the CBN vis-à-vis the expansionary policy tonne of fiscal authorities in 2016,” he said.

According to him, the possible scenarios that can play out upon conclusion of the meeting are to reduce Monetary Policy Rate for lower market and lending rates and credit expansion by banks; retain all policy rates with further administrative measures; and conserve external reserves, while also keeping the financial system liquid.