By Kelechi Mgboji
Assistant Business Editor
Central Bank of Nigeria (CBN’s) Monetary Policy Committee (MPC) will hold a crucial meeting tomorrow, Monday, November 23 and Tuesday, November 24.
Perhaps the meeting will mark a major shift in monetary and liquidity policies of this government with populist pronouncements and dispositions at a time when the United States has concluded on rates hike.
It will be the first MPC meeting since President Muhammadu Buhari inaugurated his full cabinet on November 11 and the last in the year.
Questions demanding answers
What are government’s plans for borrowing in 2016 and how could this alter the interest rate dynamics?
What could the budget look like and what does this mean for the credit outlook of banks?
If low rates stay longer, will they spur negative margins for banks? Do banks now grow loans given the weak macro environment?
If so, what capital implications, given that they need to shield profits by growing 100 per cent risk weight loans if rates remain low?
These are some of the questions on the lips of analysts.
Concern about U.S. rate hike
In the same vein, financial markets across emerging economies are concerned about looming interest rate hike in the U.S.
That could spin off investment outflow unless there is a corresponding upward adjustment of rates to pin down fund managers and foreign investors who may want to dump risky assets in emerging markets where investment risks have increased with high default probability due to a sharp drop in global commodities prices.
It will be critical to see decisions taken at the MPC meeting, particularly clarification on low rate dubbed quantitative easing (QE) by analysts is here to stay following implementation of the treasury single account (TSA).
Outlook for 2016
Going forward from 2016, will the CBN gradually reduce lending rates as promised by its chief, Godwin Emefiele, to boost manufacturing and government’s populist appeal?
Or will the CBN further raise interest rate to stave off the impact of U.S. rate hike expected to attract investments away from emerging markets back to the safe haven of the American economy?
Against the backdrop of decline in foreign exchange (forex) earnings, the need to attract investments as well as beef up local production, this last MPC meeting of the year will confront these questions which will define the outlook for 2016.
Liquidity after TSA implementation
Disposition of the CBN in favour of increased banking liquidity – after TSA implementation on September 15 took away about N1.2 trillion from the banking system – indicates possible policy shift.
About 20 banks paid N836.714 billion into the TSA as of October 27, and N500 billion more is expected to be transferred into it in the weeks ahead.
To cushion the impact, the last MPC meeting cut Cash Reserve Requirement (CRR) to 25 per cent from 31 per cent to ease liquidity squeeze that could have resulted from TSA implementation.
Since then, the CBN has taken other deliberate measures to increase money supply, raising expectations the CBN will devise a new policy to promote more lending, especially to the private sector.
Analysts at City Stockbrokers Limited (CSL) noted that the “CBN did not roll-over its Open Market Operation (OMO) programme in the recent past week.
“It did not mop up extra liquidity from the banking system, and banks could now be stuck with piles of cash they have to find uses for.
“It seems the reason for this is that banks have not been assured of the surefootedness of this policy, given the penchant of the Central Bank for policy flip flops.
“Hence they are waiting to see how long this new liquidity drive will last.”
Banking system liquidity balance has been in excess of N500 billion maintained over the past few weeks relative to less than N200 billion before September.
Bank borrowing at CBN discount window over the past three weeks has been in consistent decline, hitting N40.5 billion, and a weekly average of N60 billion against over N300 billion before September.
Robust liquidity levels resulted in crash in money market rates. The Open Buy Back (OBB), Overnight Funds (O/N) and other interbank rates hit a new low in recent weeks.
In the past eight weeks, the rates have averaged less than 2 per cent, against over 10 per cent before mid September.
With this crash in interbank rates amid excess liquidity, analysts wonder if the CBN is mulling easing policy to get banks to push excess cash into private sector lending for productive purposes.
In other words, will the CBN issue a fresh policy guideline to back up its stance on liquidity and private sector lending?
Risk level stokes interest rate
Manufacturers want a reduction in benchmark interest rate currently at 13 per cent.
Benchmark interest rate is the rate at which banks lend to one another, which in turn determines the interest rate at which customers borrow from banks.
Bank lending rate is between 25 and 29 per cent, one of the highest in the world.
Analysts at Nairametrics, a financial information house based in Lagos, said the “CBN has taken an easing stance, it has reduced cash reserve requirement from 31 per cent to 25 per cent, to enable banks have more funds to lend to the economy (this more than offsets the debit from the system due to TSA implementation).”
Former Diamond Bank Executive Director, Abdulrahman Yinusa, explained that although the Nigeria Interbank Offer Rate (NIBOR) has reduced as a result of the intervention by the Central Bank, there are other factors beyond its powers to address for lending rates to come down.
“Another reason why lending rate is still high is because of the risk-return premium. If a bank is lending to a multinational and well-structured firm, it may choose to charge maybe one or two per cent risk premium.
“But if it is giving loan to a Nigerian company, the percentage would be far higher. In Nigeria today, the risk environment has even worsened. We have to address a lot of fiscal issues in the country.
“So, this is not something the Central Bank can do alone. The CBN can only address the monetary aspect, but we still have fiscal issues to tackle,” Yinusa said.