75% CRR: These Are The 4 Axis Of Evil Threatening The Economy And Why CBN Had To Go All Gunz Blazing

The CBN in its latest MPC meeting raised its Cash Reserve Requirements on public sector funds from 50% to an astonishing 75%!! This made headlines in all financial news circles and ensured the banking index lost its highest percentage points since June 2013. But why take such a drastic decision you might wonder? The answer is in the MPC Communique itself. Here is an excerpt;

The MPC welcomed the sustained stability of the exchange rate and single digit inflation in 2013. It, however, identified four (4)  term:

1. Depletion of fiscal buffers following the continuing decline in oil revenue, rundown of reserves and depletion of excess crude oil savings; 

On the depletion of fiscal buffers, the Committee decried the continuous fall in revenue from oil despite stable price of oil and production in 2013. Although the Committee acknowledged output losses due to theft and vandalism, this
could not wholly explain the magnitude of the shortfall in revenue. As a consequence, accretion to external reserves
remained low while much of the previous savings have been depleted, thereby undermining the ability of the Central Bank to sustain exchange rate stability. The Committee therefore, urged the fiscal authorities to block revenue leakages and rebuild fiscal savings needed to sustain confidence and preserve the value of the naira.
2. Falling portfolio and FDI inflows;

The MPC also noted the reduction in portfolio inflows driven by the commencement of the QE3 tapering by the Fed, transition concerns at the CBN and continued depletion of the ECA, thus dampening investor confidence. The reduction of the US stimulus especially, could in addition, trigger capital flow reversals and put greater pressure on the naira exchange rate.
3. Widening gap between the official and the BDC exchange  rates

The Committee also expressed concern about the widening gap between the official and the BDC exchange rates, noting that this could precipitate speculation and round-tripping. Though, the BDCs represent a small component of the foreign exchange market, the widening spread appeared to have fed into creeping increases in core inflation.  The Committee re-affirmed its commitment to a stable exchange rate regime while urging the fiscal authority to
provide support by reducing fiscal leakages, improving controls around oil revenues and reviewing terms around production sharing agreements with oil companies, while awaiting the passage of the Petroleum Industry Bill (PIB).
4. Creeping increase in core inflation.

The Committee also noted the necessity for a complementary monetary policy response to ensure sustained exchange rate stability and convergence of rates in various segments.

It is quite compelling how much damage government spending and reliance on the oil sector is costing the economy. It also reveals how important it is for the economy to continue to attract FDI’s as the major source of forex in the absence of a multi import revenue base. These are indeed tough times for the financial sector.l