Deputy Governor, Central Bank of Nigeria (CBN), Mr. Adelabu Adebayo has called on the Monetary Policy Committee (MPC) to adopt new methods of addressing the problem of excess liquidity in the banking industry, saying that the methods adopted so far have been focused on the symptoms and not the root cause of the problem.
“My view is that we should begin to explore some innovative ways to address liquidity surfeit in the system”, he said in his personal statement at the last meeting of the MPC held September 18th to 19th.
Adelabu, who is the Deputy Governor in charge of Corporate Services Directorate, noted that the real threat to the exchange rate stability is not excess liquidity in the banks, but the huge importation bill due to the import dependent nature of the economy. He consequently advocated an immediate review of the list of imported items eligible for official foreign exchange.
He said, “I would like to point out that the greater part of the burden imposed on monetary policy are issues requiring active support of the fiscal authority. First, it would be difficult for monetary policy to reduce lending rate to single digit level in the light of the fact that the major drivers of lending rates relate to the competitiveness of the business environment including cost of power and security incurred by the banks as opposed to cost of funds. Secondly, the burden foreign exchange management is derived largely from the skewed structure of the economy because the bulk of the pressure in the foreign exchange markets comes mainly from payments of imports bills rather than excess reserves of the banking sector. Thus, mopping up excess banking liquidity through adjustment to CRR, as the present monetary conditions implied, would amount to treating the symptoms without addressing the root cause. I think the solution lies in exploring innovative means of deploying excess liquidity in the banking sector to productive sectors rather than considering it as a threat.
“As implied in my last statement, we are almost approaching the limit of monetary policy thus requiring considerable structural and administrative measures. Monetary policy independence appears to have been lost mainly due to the weakening external reserve position. In the short terms, appropriate administrative measures must be put in place to curtail the rate of depletion of the external reserves. As a quick win, an urgent review of the list of imported items eligible for official foreign exchange is imperative in addition to revisiting legislations around the exports of dollar in cash. Over the medium to long term, considerable efforts must be made to improve accretion to external reserves from proceeds of crude oil sales as efforts are geared towards improving business environment by building infrastructure that would promote foreign direct investments.”
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