By Milcah Tanimu

Efforts by the Federal Government to combat the escalating inflationary pressures will result in the withdrawal of N5 trillion from the banking sector as the Central Bank of Nigeria (CBN) enforces an increase in banks’ Cash Reserve Ratio (CRR) to 45 percent.

The CRR, which signifies the portion of banks’ deposits kept as reserves for meeting immediate cash requirements, has been raised from 32.5 percent to 45 percent in a bid to curb inflation.

Simultaneously, the CBN is collaborating with foreign portfolio investors (FPIs) to address concerns regarding recent reforms in the foreign exchange market and the 400 basis points hike in the Monetary Policy Rate (MPR).

This collaboration was discussed during a virtual meeting, dubbed the Foreign Portfolio Investors Call, organized in partnership with NGX Group. The meeting featured addresses by CBN Governor Mr. Olayemi Cardoso, Deputy Governor of Economic Policy Mohammad Abdullahi, and was moderated by the Group Managing Director/CEO of NGX Group, Mr. Temi Popoola.

During the meeting, CBN Deputy Governor Abdullahi revealed that the banking system faces a shortfall of N5 trillion to meet the new 45 percent CRR requirement. However, he assured that the implementation of the increased CRR would be gradual and non-disruptive to the industry.

Prior to the Monetary Policy Committee (MPC) decision, the effective CRR for the industry hovered around 40 percent. Abdullahi also mentioned that some banks have already exceeded the 45 percent CRR and would be refunded the excess, while those with shortfalls would need to build up their reserves.

The estimated N5 trillion withdrawal, representing excess system liquidity beyond the initial CRR range, is anticipated to adversely impact the liquidity of many banks.

The decision to tighten monetary policy comes amidst a concerning inflationary trend, with year-on-year inflation reaching 29.9 percent, the highest since the return to democracy in 1999. Financial analysts project that inflation will remain elevated in the near term due to persistent exchange rate pressures, rising energy costs, and sustained fiscal imbalances.

In response to these challenges, the CBN Governor emphasized the need to address structural inefficiencies in the foreign exchange market and collaborate closely with fiscal authorities to manage non-monetary factors effectively.

Analysts recommend that the CBN prioritize policy measures to minimize distortions and focus on improving supply rather than countering liquidity symptoms. They anticipate an immediate and significant downward repricing of fixed-income yields, particularly on short-dated bills, coupled with expectations of a higher interest rate environment and liquidity squeeze.

Meanwhile, the CBN assures FPIs of free entry and exit from the forex market, with a commitment to exchange rate stability and reasonable price discovery. The MPC’s unanimous decision to tame rising inflation through a 400 basis points hike in the MPR sends a strong signal of policy consistency and determination to achieve price stability.

Additionally, the CBN will review upward the interest rates on Treasury bills in line with the MPR hike, and increase the frequency and size of Open Market Operations to facilitate liquidity withdrawal and provide investment instruments for FPIs.