The Central Bank of Nigeria (CBN) borrowing to satisfy urgent short-term demands decreased by 15.3% last year to N11.01 trillion, according to financial data obtained by The Guardian, giving deposit money banks (DMBs) less cause for concern about liquidity.
Banks borrowed N13.01 trillion in total from the apex bank in 2021 using its Special Lending Facility (SLF). In the ensuing 12 months, the amount decreased by as much as N2 trillion, reaching N11.01 trillion.
The Special Deposit Facility (SDF) window saw a little increase in banks’ overnight savings at this time. In total, the banks saved N3.2 trillion, or 5.7% more than was reported the year before, using the window to un-park their excess short-term liquidity.
Thus, the CBN’s net lending to banks to cover their short-term liquidity needs for the entire year came to N7.8 trillion. Two pillars of the discount window facility, the SLF and SDF, assist commercial banks in managing their short-term liquidity requirements through lending or borrowing. For SDF that satisfies the window’s requirements, banks received the equivalent of the MPR of less than 700 basis points (bps).
On the other hand, they paid interest to the Central Bank on any money obtained from SLF equal to MPR plus 100 bps. A frequent or significant use of SLF is a warning that banks may be experiencing a liquidity problem.
SLF increased by 163% to almost N13 trillion after the COVID-19 crisis in 2020, whereas SDF decreased by more than half, from N6.37 trillion to N3 trillion. Interest rates were then quite low, which hurt the money market’s appeal.
Nigeria enacted a stringent monetary policy last year as it, like the rest of the world, struggled with inflation that reached a befuddling 21.47 percent as of November.
The monetary policy rate (MPR) was increased by 500 basis points from May, the start of the current rate hike cycle, through November (bps).
Additionally, the savings interest rate was increased to 30% of MPR, increasing the cost of money for many banks. As the business environment gets more risky, The Guardian has claimed that the banks would use SDF and debt instruments to unpark their cash reserves.
The upcoming elections make the perceived increased risk worse. According to experts, the difficulty in obtaining capital for the real sector will worsen over the next few months.
Sadly, according to Dr. Chiwuike Uba, a development economist, the monetary tools are powerless to stop the current inflationary pressure, which is 90% caused by other causes, such as the pass-through effect from foreign exchange.
“There is no question that inflation will continue to increase in 2023 because the engines of inflation have not yet been properly combated. Over 70 per cent of inflation is driven by the exchange rate (depreciation of the naira), with diesel and aviation accounting for over 11 per cent and about seven per cent by other exogenous shocks. Interestingly, the contribution of the money supply to inflation is below 10 per cent.”
“Yet, the policy direction of the CBN largely focuses on the money supply, without the effort needed to address ways and means and the question of the exchange rate. The CBN’s contribution to the federal government through ways and means is about 40 per cent of the total money supply, which in turn contributes to inflation,” Uba argued.