CBN: Monetary Policies Meant to Curb Frivolous Dollar Demand-By Obinna Chima in Lagos and Omololu Ogunmade in Abuja

The Central Bank of Nigeria (CBN) on Wednesday maintained that its resolve to devalue the naira, increase the Monetary Policy Rate (MPR) and private sector Cash Reserve Ratio (CRR) on Tuesday will help curb what it described as the frivolous demand for the dollar.

CBN Deputy Governor, Corporate Services Directorate, Mr. Adebayo Adelabu said this when members of the House of Representatives Committee on Banking and Currency visited the central bank’s Lagos office on oversight duty.

He said the monetary policy measures would discourage banks from lending to unproductive sectors of the economy, insisting that banks should lend to critical and desirable sectors of the economy in order to stimulate growth.

The MPC had moved the mid-point for the official exchange rate from N155 to the dollar to N168 to the dollar. It also raised the MPR, the benchmark interest rate by 100 basis points to 13 per cent from 12 per cent, just as it adjusted CRR on private funds held by the banks to 20 per cent from 15 per cent.

But Adelabu explained that the measures were the best the central bank could do under the present circumstances.

He added: “We noticed that a lot of things contributed to the pressure on the naira. Firstly was the declining revenue from oil. Our source of revenue in this country is mainly oil and when oil prices declined by about 25 per cent in the last one month, we expected that there would be pressure on foreign reserves.

“We believe that the pressure on the naira, apart from the declining oil price was also as a result of liquidity in the banking industry whereby a lot of frivolous demands were being made by customers.

“So we want banks to lend to the critical and desirable sectors of the economy and to sectors that can engender production activities, not trading, not for people to import toothpicks.

“And the only thing to do to stop banks from granting loans to these customers is to mop up some of the monies available to the banks. That was why we increased the CRR on private sector deposits.”

The CBN deputy governor expressed optimism that the measures would reduce the pressure on foreign reserves.

“If we did not do that, the impact on the common man is going to increased cost of production. What the CBN is saying is that we need to become more patriotic.

“We should patronise locally made goods and services. We do not need to import everything. That was part of the pressure on the naira. Why should we be importing fruits, eggs, tooth picks into Nigeria?” he queried.

Although Adelabu noted that there would be pressure on banks to increase interest rates in view of the hike in CRR and MPR, he urged the financial institutions not to be aggressive in raising interest rates.

“We only increased MPR by one per cent, so we expect banks not to respond too aggressively by increasing interest rates. Any bank that wants to increase rates beyond an affordable limit, customers would go to another bank with lower interest rates.

“Any bank that is making an excessive spread between its lending rate and cost of funds will also be called to order,” he stated.

He said the CBN remains focused on price stability.

Commenting on the N220 billion micro, small and medium scale enterprises (MSME) development fund, the deputy governor told the lawmakers that the fund was introduced in order to rebuild the middle class in Nigeria.

According to him, the Development Finance Department that is under the purview of the CBN governor monitors the activities of beneficiaries of the loans so as to avoid its diversion for other purpose.

Earlier, the Chairman of the Committee, Hon. Jones Onyeriri pointed out that financial system stability is very paramount to the country.

He urged the central bank to cut down on its level of intervention projects scattered all over the country in order to concentrate on its core mandate.

“My thinking is whether these (intervention projects) are not a distraction? The CBN needs to look at the impact of its policies on the down trodden because as representatives, we deal directly with these people and they are complaining about the high interest rates.

“It is our duty to recreate the middle class. So I think for the CBN, because we are in trying times, I think you should concentrate more on recreating the middle class instead of directing your attention on things that might not have a direct relationship with your core mandate,” he said.

In response to the monetary policy measures introduced by the CBN Tuesday, the naira appreciated by N1.15 at the interbank market, closing at N176.6/$1 yesterday, compared to the N177.75/$1 at which it closed the day before.

Also, THISDAY learnt that although the central bank announced that it was offering a total of $200 million at the Retail Dutch Auction System (RDAS) on Wednesday, it ended up selling a total of $666.96 million.

This, according to dealers, was to reinforce the regulator’s willingness to support the naira.

However, at parallel market points visited by THISDAY in Lagos, while the naira sold for N180/$1 at Marina, in Apapa, it was sold at N182/$1 while in Ikeja it exchanged for $184/$1.
An analyst at Ecobank Nigeria, Mr. Kunle Ezun said the central bank’s action would help stabilise the market.

“With the widening of the forex band, there is so much leverage to accommodate market volatility. That will help to realign market expectations. Over time, the pressure on the naira will reduce,” he said.

In the equities market, market capitalisation rose by N154 billion to close at N11.417 trillion on Wednesday, from N11.263 trillion recorded the previous day. Similarly, the All-share index climbed to 34,583.29, from 34, 115.84.

In the meantime, the nominee for deputy governor of the CBN, Dr. Joseph Nnanna, on Wednesday dismissed reports that the central bank had devalued the naira, saying CBN only announced exchange rate as dictated by market forces.

Nnana, who made this submission in the National Assembly during his screening by the Senate Committee on Banking, Finance and Other Financial Institutions, insisted that the central bank “only followed the three principal markets in Nigeria - the official, interbank and parallel markets”.

He explained, however, that CBN would not pursue the policy permanently, stating that it will only run concurrently with the ongoing transformation in agricultural sector.

This, he said, would increase export of products from Nigeria and simultaneously guarantee the generation of more foreign exchange for the country.

He said: “We better do it now than later when we will have import control which would bring about an essential commodity crisis. Nigerians should be patient; unfortunately, Nigerians are always in a hurry.

“So let us give the central bank time to pursue a policy that will be a blessing to all of us. I commend the CBN for being proactive with the policy.”

The banker also spoke on the need to recapitalise development banks with the aim of encouraging them to lend at controlled interest rates, saying doing so will help Nigeria out of its current economic crisis.

He said: “My take is that since we have development banks like the Bank of Industry, Nexim Bank, Bank of Agriculture, and so on, we can recapitalise all of them and mandate them to lend at a fixed interest rate for the entrepreneurs and other investors willing to invest in the Nigerian economy.

“If we recapitalise the Bank of Industry (BoI) and we tell the managing director that we are giving you this money and ask him to lend at a specific interest rate, he will oblige us because it is the tax payers’ money.

“We cannot force the management of a private commercial bank to lend at a fixed rate because they will take into consideration the risk premium especially when most people borrow without the intention of repayment.”

Culled from This day