Naira Scarcity Bites Harder As MPC Raises Interest Rate To 18%

 The scarcity of Naira notes has continued to bite harder on Nigerians despite the Central Bank of Nigeria (CBN) announcement that the old N500 and N1,000 notes remained legal tender.

One week after the CBN directed banks to pay out and receive the old N500 and N1,000 notes, from the banking public, the scarcity persists as mammoth crowds besiege banks daily.

This is as the Monetary Policy Committee (MPC) of the CBN yesterday raised the country’s benchmark lending rate to 18 per cent from 17.5 per cent previously.

Governor of the Central Bank of Nigeria Mr Godwin Emefiele has said the nation’s banking sector is very sound and insulated from the effect of the recent failure of some banks in the United States of America and Switzerland.

As a proactive step towards ensuring that the Nigerian banking system is not affected by the contagious banks’ failure the west, Mr Emefiele said the central bank has reviewed the various prudential guidelines it already had in place and found that there is no direct investment by any Nigerian bank in Silicon Valley Bank that could result in the loss of investment from Nigeria.

Mr Emefiele who made the remarks yesterday while briefing journalists on the outcome of the 2-day meeting of the Monetary Policy Committee meeting in Nigeria, also said the CBN is currently holding over N14 trillion in cash reserve deposit from the banks.

This is as the MPC yesterday, increased the official interest rate by 50 basis point, in a consistent tightening policy measure to tame inflation in Nigeria. By the new increase in the monetary policy rate means that the CBN has capped official interest rate at 18 percent from 17.5 percent in January, 2023.

On whether the Nigerian banking system is reasonably insulated to ensure that what happened in the United States does not happen in Nigeria, Emefiele said “we reviewed the various prudential guidelines we have put in place, Nigeria is one of the few countries in the world where you have cash reserve requirement. A certain percentage of your deposit is held or serialised at the Central Bank of Nigeria to ensure that when there is liquidity crisis, that money is available for them to use so that depositors won’t lose their money.

Emefiele noted that the prudential guidelines put in place in the banking industry which includes the cash reserve requirement has been instrumental to ensuring that the current wave of bank failures being seen in the United States had insulated the local banking industry.

Over the past two weeks, two banks, Silicon Valley Bank (SVB) which was the 16th largest banks in the US and Signature Bank had failed while Credit Suisse, a Swiss Bank had failed and was sold off this week. However, the CBN governor noted that the failure has zero impact on the Nigerian banking industry.

According to him, this was due to the measures that had been taken to safeguard depositors’ fund. Emefiele stated that Nigeria, is one of the countries of few countries in the world where we have cash deposit requirement, adding that “there is no direct investment by Nigerian banks, in SVB that could result in a loss of investments.

“That that’s one part, the second part is how are we sure that the Nigerian banking system is reasonably insulated to ensure that what happened in US does not happen in Nigeria. So, we reviewed the various prudential guidelines were put in place.  We have put in place a couple of prudential guidelines to regulate the Nigerian bank and that we see and make good to see that the financial soundness indicators in the Nigerian banking industry shows that the banking industry remain very, very resilient compared to what we find in other climes.

“For instance, capital adequacy ratio, which is meant to be between 10 and 15 per cent, today it is about 13.7 per cent. Non-performing loans ratios has dropped to 4.2 per cent. Liquidity ratio is about 43 per cent. Return on equity is at least 21 per cent, which we think is reasonable. Cash reserve today, aside from treasury bills that we are keeping, we are today holding close about N14 trillion in cash reserve deposits. This is good liquidity that is meant to actually act as insulation.”

The bank failures in the US and Switzerland occurred following the persistent interest rate hikes in the US. Experts said it has adversely impacted the broad portfolio of banks in the US.

The CBN governor said the Financial Soundness Indicators (FSIs) in Nigeria indicates that the Nigerian banking system remain resilient due largely to the stringent prudential guidelines put in place by the CBN which has resulted in a strong build-up of not only the Cash Reserve Ratio (CRR) in Nigeria, but also the Liquidity Ratio and capital Adequacy Ratio.

“In the light of these strong FSIs, MPC was comforted that its various decisions in increasing MPR have had moderate impact on inflation, given that the rate appears to have plateaued in Nigeria,” Emefiele said, adding, “We are happy that in spite of maintaining these prudential, the banks still remain profitable,” insisting that the CBN has put in place prudential regulations that have insulated the Nigerian banking industry from the kind of risk or contagion that happened in the US last week. “I believe we’ve done well.”

Meanwhile, in a decision of 10 majority vote, the MPC retained the asymmetric corridor of +100/-700 basis points around the MPR; retain the CRR at 32.5 per cent; and retain the Liquidity Ratio at 30 per cent.

The central bank said the aim is to keep inflation rate under control, citing the gains if previous rate high as reason for its new action.

Nigeria’s headline inflation remains high with increased expectations of price development due to the perennial scarcity of PMS and ongoing discourse around the removal of fuel subsidy. With the prices of other energy products also rising, MPC members stressed the importance of addressing price development.

The CBN claims that its naira redesign and cash withdrawal limit policies have resulted in a sizeable reduction in Currency-Outside-Banks, indicating an expected improvement in the potency of monetary policy tools.

Emefiele who apologized for scarcity of banknotes and poor online transactions, also called on other depository corporations, online payment platforms, and other stakeholders to ensure that the prevailing incidence of network failures is overcome in the immediate and short term. “This would ensure that the Naira Redesign and Cash Withdrawal Limit Policies lead to an improved in-road of the CBN Cashless program and efficiency of the transmission mechanism of monetary policy,” the MPC said.