LCCI Frets Over 27.5% CRR
GILBERT EKUGBE
The Lagos Chamber of Commerce and Industry (LCCI) is concerned leaving Cash Reserve Requirement (CRR) at 27.5 percent would spike interest rates and dimmed the new growth being witnessed in the real sector.
The Central Bank of Nigeria (CBN) last Friday reviewed upward, the CRR from 22.5 per cent to 27.5 per cent, a measure that further reduces liquidity at the disposal of the commercial banks.
This, LCCI noted is counterproductive as it would lead to a reversal of the current downward trend in interest rate which was impacting positively on the economy, especially the real sector.
LCCI Director-General, Muda Yusuf, said the increase could have adverse effect on deposit mobilization which could impact negatively on the financial intermediation role of Deposit Money Banks (DMBs), resulting to a high-interest trajectory.
This policy which further tightens up liquidity, LCCI said will impact negatively on investment growth especially in the real economy.
Yusuf in a statement also noted that the prospects for increased job creation may be further dimmed, adding that the recent rebound in the stock market would suffer a reversal as interest rate increases and money market instruments become more unattractive to investors.
“We believe that what the economy needs at this time are policy actions aimed at stimulating investment to boost output, create jobs and ultimately moderate inflation. Monetary policy tightening will negate the realization of these objectives.”
The Director General noted that it is pertinent for managers of the Nigerian economy to prioritize domestic investment growth and foreign direct investment (FDIs) over Foreign Portfolio Investment (FPIs), stressing that persistent focus on portfolio flows would continue to propel the apex bank to keep interest rates high.
“This is inimical to investment growth and job creation endeavours,” he said.
There was belief the recent hike in CRR will help moderate inflation which the Chamber flawed, noting that food inflation is the bigger issue that needs to be dealt with in the inflation equation, saying that over the past few years, it has stubbornly remained in double-digit territory since June 2015 while core inflation trends in single digit.
“We believe that food inflation is not driven by liquidity nor is it a monetary phenomenon. The continuous uptrend in inflation is driven largely by cost-push factors rather than demand-pull factors. Against this backdrop, the way forward lies in fixing the structural problems fuelling inflationary pressure as monetary policy instruments will have almost no impact in moderating inflation,” he said.
Food inflation accelerated to 14.67 percent in December 2019, the highest in the last twenty months which LCCI argued is driven by cost of production, transportation cost, processing costs, very low productivity in agricultural activities at the primary level, security issues, seasonality and climate change.
These are more important issues to address and beyond what monetary policy actions can resolve.
The Chamber believes the high-interest rate trajectory at this time will hurt the economy.
“It will become increasingly difficult to unlock investment and jobs in real estate, manufacturing, agriculture, mining, infrastructural deficit, if the economy is taken back to the path of high-interest rate regime” .
High-interest rates regime is synonymous with high inflows of portfolio funds which are volatile and undependable and which in some advanced economies, conscious efforts are being made to keep interest rate low and, in some cases, negative.
For instance, currently, policy rate in the United States range between 1.5 percent and 1.75 percent ; 0.75 percent in United Kingdom and -0.1 percent in Japan. December 2019 inflation number printed at 2.3 percent , 1.3 percent and 0.8 percent in these countries respectively.
LCCI believes the implementation of the CRR should be within a framework that allows for automatic adjustment that reflects the dynamics of bank deposits.
“The failure to have this could result in a situation where the CRR of some banks will shoot up to as high as 40 percent , or more which poses a risk to the stability of the financial system. As deposits level changes (rises/falls), cash reserves in the custody of the Central Bank should be automatically adjusted”, the body advised.
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