The International Monetary Fund (IMF) has advised the Central Bank of Nigeria (CBN) to rationalise its frequent adjustment of the Cash Reserve Ratio (CRR) as a monetary policy instrument.
In fact, the multilateral institution pointed out that frequent changes to the CRR force banks to make abrupt adjustments in their portfolios and as such, could induce volatility in financial market prices.
The IMF stated this in its financial sector assessment programme update on Nigeria titled, “Strengthening Monetary and Liquidity Management Technical Note July 2013”, released at the weekend.
The CRR is the minimum cash, as a percentage of customers’ deposits and notes that each commercial bank must set aside in reserve. This cash cannot be used for other purposes or lent out.
The CBN had in July raised the CRR for public sector funds to 50 per cent, while the CRR for private sector customers’ deposit is at 12 per cent.
A recent comparison of the CRR in four African countries showed that Nigeria has the highest CRR for both private and public sector deposits, with Kenya at 5.25 per cent, Rwanda at five per cent and Ghana at nine percent.
Continuing, the IMF in the 25-page document noted the CRR should best be used to create a stable demand for reserves consistent with the level of systemic liquidity.
It added: “Some countries have used high cash reserve ratios mainly to sterilise substantial capital inflows in the context of managed foreign exchange rate regimes (e.g. China and Brazil).
“However, most countries keep this ratio low and stable. An increase in the CRR, particularly when it is unremunerated, imposes additional costs on banks, which then get passed on to the economy in the form of wider interest rate spreads.
“It is estimated that where banks have constant costs per unit of deposit, a two per cent increase in the level of the CRR adds approximately 0.5 per cent to the spread between deposit and lending rates.
“Therefore, changes in the ratio should be infrequent and made only when there is a strong reason not to use market-based instruments (i.e. Government/CBN securities and foreign exchange sales).”
It also urged the central bank to clarify its overall monetary framework to avoid the impression of pursuit of multiple objectives, adding that clear communication of policy objectives and targets to the market could increase transparency and effectiveness.
“However, frequent changes to the operating procedures of monetary policy have tended to undermine the credibility of the framework. Over the past two years, the Monetary Policy Rate (MPR) corridor has varied between 400 basis points and 700 basis points.
“At times, the CBN appears to be guiding short-term interest rates towards the MPR, while at other times these rates are pushed towards the upper range of the corridor.
“Moreover, the frequent and abrupt use of the CRR, which was gradually raised from one per cent in 2010 to 12 per cent in 2012, drives an increasing wedge between banks’ costs and their receipts, makes it harder for them to manage their liquidity effectively.
“Finally, abrupt changes in regulations also affected the credibility. For example, in August 2012, the Open Buy Back (OBB) rate spiked when the CBN prohibited the banks from participating in the wholesale foreign exchange sales throughout the term of their repurchase or standing lending transactions with the CBN,” it declared.
The fund also recommended that the CBN should strike a balance between the use of foreign exchange sales and domestic instruments for liquidity management, just as it called for further strengthening of coordination between the fiscal and monetary authorities.
“The weekly meetings of the Fiscal Liquidity Assessment Committee (FLAC), which is comprised of representatives from the CBN and FGN ministries, departments and agencies, have helped improve liquidity forecast,” it noted.
Meanwhile, the National Bureau of Statistics (NBS) yesterday stated that the Nigerian economy added 45,108 jobs in the first quarter of the year, bringing the total number of jobs created in the period to 431,021.
The figure, according to NBS’ latest Job Creation Survey, which was released by the Statistician General of the Federation (SGF), Mr. Yemi Kale, represented an increase of 11.69 per cent when compared to the 385,913 jobs created in the fourth quarter of 2012.
According to the report, the formal sector of the economy contributed 174,326 jobs in the first quarter of 2013, while the informal and public sectors generated 232,327 and 24,368 employment respectively.
In the fourth quarter of 2012, however, 152,018 jobs were attributed to the formal sector, while the informal and public sectors created 208,920 and 24,975 jobs respectively.
The report further stated that 145,032 full-time jobs were created in the first quarter, representing a 20.96 per cent increase in comparison to 119,905 full-time formal jobs recorded in the last quarter of 2012.
The report said: “The top three sectors that produced the highest number of full-time jobs in Q4 2012 were education, followed by financial intermediation, health and social work.
“In Q1 2013, the same sectors maintained the top three positions for generating full-time jobs. This is indicative of the huge investment in these sectors, particularly in the education and health sectors.”
However, part-time employment declined by 9.62 per cent to 29,293 jobs in the first quarter of the year compared to 32,112 in the last quarter of last year.
The NBS added: “The informal sector generated one-third of more jobs than the formal sector in the same first quarter 2013. However, the formal sectors showed the greatest increase between the two quarters of 14.68 per cent or more jobs created than in the fourth quarter of 2012.
“Job creation in the public sector is the only area to exhibit a decline from the fourth quarter of 2012 to the first of 2013 by 2.43%.”
Posted by SirVic for wetopup(News Laboratry)