- Amidst warning by Central bank of Nigeria (CBN) that Nigeria could slip into economic recession in 2016, Fitch Ratings on Thursday has stated that cutting reserve requirements will not add liquidity to the Nigerian banking system because it releases no additional foreign currency (FC).
- Fitch said that substantial government-related FC deposits are exempted from reserve requirements and have already been withdrawn from the system after the government ordered all public-sector deposits to be moved from commercial banks into the centralised Treasury Single Account (TSA) earlier this month.
“Nigeria’s Monetary Policy Committee reduced mandatory reserve requirements on all local-currency (LC) deposits to 25 per cent from 31 per cent this week in the hope that this might ease liquidity pressure, stimulate new lending and boost economic growth. This should provide some additional LC liquidity into the banking system but around NGN1.3 trillion (USD6.5bn) of deposits were sucked out of the banks in September, reflecting transfers to the TSA”, the statement said.
According to Fitch: “Lower reserve requirements will not offset the tighter FC liquidity at Nigeria’s banks as a currency split of public-sector deposits is not disclosed but in our opinion, FC deposits are substantial, held up by oil-related deposits.
The centralising of public-sector and government-related FC deposits at the TSA has made it increasingly difficult for commercial banks to meet customer demand for FC. FC availability was already strained in 2015 due to falling oil revenues, central bank action to defend naira depreciation and heightened negative investor sentiment towards emerging markets”.
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