Nigeria’s banking reserves surged to N26.8 trillion in August 2024, a substantial increase from N19.4 trillion a year earlier, as the Central Bank of Nigeria (CBN) continues its aggressive monetary tightening under Governor Yemi Cardoso.
The jump comes in response to the CBN’s efforts to contain rising inflation and curtail excessive liquidity in the financial system.
At its most recent Monetary Policy Committee (MPC) meeting, the committee raised the Monetary Policy Rate (MPR) by 50 basis points to 27.25%, signaling a continuation of its tightening cycle.
Perhaps more significantly, the MPC also raised the Cash Reserve Ratio (CRR) by 500 basis points to 50%, a clear indication of the apex bank’s determination to mop up liquidity and stabilize the economy.
CRR Hikes under Cardoso’s leadership
Since taking office, Governor Yemi Cardoso has relied heavily on the CRR to manage liquidity, drive up reserves, and temper inflationary pressures.
- The CRR, which stood at 27.5% in September 2022, was first increased to 32.5% under the previous leadership.
- However, it wasn’t until Cardoso’s first MPC meeting in February 2024 that the CRR was sharply raised to 45%, with further increments pushing it to 50% in August 2024.
- In addition, the March 2024 MPC meeting saw an increase in the CRR for Merchant Banks, from 10% to 14%.
- This has widened the net of liquidity management across the financial system, contributing to the notable rise in bank reserves.
The resulting growth in bank reserves reflects the cumulative effect of these policies, with reserves expanding by N7.4 trillion between August 2023 and August 2024.
A large portion of this increase occurred between December 2023 and August 2024, when reserves jumped by N2.1 trillion in the last two months alone, coinciding with steep CRR hikes.
Inflation, Money Supply, and the strain on liquidity
The CBN’s policies come in response to the twin challenges of inflation and a growing money supply.
- Nigeria’s inflation rate remains persistently high at 32.15% as of August 2024, driven by structural inefficiencies, global price pressures, and volatile energy costs.
- In this context, the CRR hikes serve as a direct mechanism to reduce the money supply, which currently stands at N107 trillion, by locking up funds in central bank reserves.
- In its September 2024 meeting, the MPC recognized the continued expansion of money supply and the urgent need to curb excess liquidity.
- The committee expressed concern over the inflationary pressures exacerbated by this surplus liquidity, particularly in light of rising foreign exchange demand.
- The MPC also noted the growing fiscal deficit but acknowledged that the government remains committed to refraining from monetary financing through Ways & Means.
The CBN’s approach to managing liquidity through CRR hikes and interest rate adjustments is part of a broader strategy to control inflation and maintain price stability.
Bankers voice concern
Bankers have voiced concerns over the impact of these aggressive CRR hikes. With the CRR now at 50%, banks are compelled to lock half of their customer deposits at the CBN, where they earn no interest.
Yet, they continue to pay interest on the full 100% of deposits they receive. This dynamic is placing increasing pressure on banks’ margins, making it more difficult for them to lend effectively and maintain profitability.
- “As it stands, we are paying interest on 100% of deposits but only have access to 50% to lend out,” noted one banker.
- This situation is particularly acute when viewed through the lens of savings accounts, which currently carry an average interest rate of 8.2%.
- “Half of those savings deposits go straight to the CBN, where we earn 0%,” the banker lamented. “In essence, we are paying 16.4% (8.2% on the total deposit) for the portion of the funds we actually get to lend, which is clearly unsustainable.”
This sentiment echoes across the sector, as other bankers have similarly described the CRR levels as stifling. The liquidity crunch created by the CRR hike not only limits banks’ ability to lend but also raises borrowing costs for businesses and consumers, which could further stifle economic growth.