CBN Makes U-Turn, to Inject Naira into the Economy

Central Bank of Nigeria (CBN) yesterday loosened monetary policy by injecting liquidity into banks, in a bid to stave off recession in Africa's biggest economy, which has suffered as oil prices fell.

Liquidity on the interbank market has also dried up since authorities last week forced commercial banks to move government revenue to a Treasury Single Account (TSA) at the central bank, part of a drive by President Muhammadu Buhari to fight graft.

The move to inject liquidity into the economy is coming on the heels of flood of criticism of the apex bank’s management who have been accused of inflicting pain at the worst time for Nigeria.

 They fear that Godwin Emefiele’s led CBN is jeopardising the hard-won credibility of the country as an attractive frontier market.

The CBN however responded yesterday by keeping its benchmark interest rate on hold at 13 percent but cut banks' cash reserve ratio to 25 percent from 31 percent.

Emefiele said the move that should allow banks to lend more to factories and businesses.

"Having seen two consecutive quarters of slow growth, the bankers committee recognized that the economy could slip into recession in 2016 if proactive steps were not taken to revive growth in key sectors of the economy," Emefiele told reporters in Abuja.

He said the bank would stick to foreign currency curbs to encourage local production of essential food items.

Only last week, more than a dozen Lagos- and London-based economists, investors and analysts told the Financial Times they thought the central bank should allow the currency to find its market value.

They estimate this should be between 10 and 20 per cent lower than the official interbank rate, which is between 197 and 199 naira per dollar.

Also Reuters reported that liquidity on the interbank market has dried up since authorities last week forced commercial banks to move government revenue to a Treasury Single Account (TSA) at the central bank, part of a drive by President Muhammadu Buhari to fight graft.

Buhari has said he wants to diversify the economy but has faced criticism for failing to name a cabinet since taking office on May 29, leaving the central bank to deal with frustrated foreign share and bond investors.

JP Morgan is kicking Nigeria out of a key bond index, citing a lack of liquidity and transparency in the currency market.

"No organisation has been exempted from the TSA," Emefiele said, denying Nigerian press reports about alleged exemptions to relieve the pain being felt by banks.

Emefiele said the banks were in good health despite the deposit removals, whose volumes he declined to specify. Analysts have estimated up to 1.2 trillion naira ($6.03 billion), or 10 percent of banking deposits, may be sucked out of the financial system.

He said the bank had cut the reserve ratio to stimulate growth amid falling industry output and rising unemployment. Economic growth dropped to 2.35 percent in the second quarter from 6.54 percent a year earlier.