FSDH calls for CRR reduction

FSDH Group Research, a Lagos based research firm and a merchant bank, has called on the Central Bank of Nigeria (CBN) to reduce the Cash Reserve Ratio (CRR) from 31 per cent to 26.09 per cent.

The CBN is expected to hold its Monetary Policy Committee (MPC) this week and FSDH in its report has urged MPC to change its CRR policy stance in order to increase the level of liquidity in the financial market to support credit growth in the economy.

The report by FSDH noted that the implementation of the Treasury Single Account (TSA) has brought about liquidity tightness in the system, with about N1.2trillion withdrawn from the banking system to the CBN last week.

According to FSDH report, “At the end of its July 2015 meeting, the MPC maintained the Monetary Policy Rate (MPR) and the Liquidity Ratio at 13 per cent and 30 per cent respectively, and maintained the CRR on public and private sector deposits at 31per cent.

“The recent domestic and international economic and financial market developments provide strong arguments for the MPC to change its policy stance in order to increase the level of liquidity in the financial market to support credit growth in the economy.

“The implementation of the TSA has brought about liquidity tightness in the system, with about N1.2trillon withdrawn from the banking system to the CBN.

“As at Half Year 2015, we estimated the total deposits of the Nigerian banks at N18.06 trillion. If N1.2 trillion, which represents the FGN deposit, is withdrawn, the total private, state and local governments’ deposits would be N16.86 trillion.

“Assuming that the total State Governments of Nigeria (SGN) and Local Governments (LG) deposits represent about 60per cent of the FGN deposits, N720 billon would be withdrawn if all the SGN and LG implement the TSA policy, bringing the total withdrawal to N1.92 trillion.

“The total private sector deposit that would be in the system is N16.14 trillion. 

Following the full implementation of the TSA on all government deposits, we expect total credits of about N595.2billion into the system via CRR refund, made up of N372 billion from FGN deposit and N223.20 billion from the SGN and LG deposits.

“The system liquidity would therefore be short by about N1.33trillion compared with the pre-TSA implementation. Meanwhile, the system liquidity would be short by N828billion if only FGN deposits are withdrawn,” the company explained.

The FSDH report noted that the reduction in the CRR to 26.09 per cent will completely neutralise the impact of the TSA implementation on the FGN Deposits, while a reduction of CRR to 22.79 per cent will completely neutralise the impact of the implementation of TSA on all government deposits.

“Any reduction beyond what we mentioned here will inject more liquidity into the system than pre-TSA implementation,” the report by FSDH stated.

The research company thus predicated that the inflation rate would increase to 9.7per cent at the end of 2015 and above the CBN’s target range of 6-9 per cent.