Nigeria tightens screws on banks with higher cash requirements
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INTERNATIONAL - Nigeria turned the screws even tighter on lenders by increasing the amount of money they need to park with the central bank for the first time in almost four years in an effort to tame inflation.
The West African nation’s central bank raised the cash-reserve requirement for lenders to 27.5% of total deposits, from 22.5%, to curtail excess liquidity in the banking sector, Governor Godwin Emefiele told reporters Friday in the capital, Abuja. At the same time the monetary policy committee kept its key lending rate unchanged at 13.5%.
While the central bank is trying to encourage lenders to extend more credit in a bid to reignite economic growth, it is also wary of flooding the system with too much cash, which will stoke price increases. In October, policy makers banned individuals and non-banking firms like pension funds from buying high-yield short-term government bonds. This is causing more money to wash around in the system because there is no place for it to be invested other than deposits or instruments like equities.
The move will drain as much as one trillion naira ($2.8 billion) from the banks, Omotola Abimbola, an analyst at Chapel Hill Denham Securities Ltd., said by phone. The latest steps come after lenders were last year forced to boost their minimum loan-to-deposit ratio to 65%.
The increase in the cash requirements “could be a gag on banks’ earnings because the CRR is a very aggressive way of tightening liquidity,” Abimbola said.
Inflation quickened to a 20-month high in December and has now been above the central bank’s target band of 6% to 9% for more than four years. Food price-growth is one of the key drivers, partly because costs are pushed up by shortages caused by a closure of Nigeria’s land borders that started in August.
Emefiele said the recent uptick in inflation was due to structural and supply-side factors, expansionary fiscal policy and growth in money supply. It’s a concern and getting to a level where economic growth is “retardant,” he said.
The central bank’s task of managing inflation is being complicated by an economy that’s still struggling to recover meaningfully from a contraction in 2016. The International Monetary Fund projects gross domestic product will expand 2.5% this year and Emefiele said the MPC sees growth at 2.35%.