Manufacturing sector threatened as CRR rises 45.5% to N13.81trn

As exchange rate volatility prompts multinational companies to exit Nigeria, concerns arise among economists and investment analysts about a potential domino effect on businesses. The Cash Reserve Ratio (CRR), the amount of banks’ deposits with the Central Bank of Nigeria (CBN), surged by 45.51 percent in the nine months leading up to September 2023, raising worries about its impact on economic growth.

Financial experts assert that Nigeria’s high CRR, among the world’s highest, hampers economic expansion by limiting companies’ access to credit and elevating credit costs. The analysts urge the new CBN leadership to stabilize the exchange rate, address fiscal issues, and alleviate the adverse effects of the CRR on the economy.

Mandatory reserve deposits, a percentage of customers’ deposits kept with the CBN, restrict banks’ day-to-day operations. The CBN utilizes the CRR as a monetary policy tool to regulate money supply, tighten liquidity, and control inflation.

During the reviewed period, the CRR was raised to 32.5 percent from 27 percent by the Monetary Policy Committee (MPC) and has been maintained at that level. Financial statements of major banks indicate a 45.51 percent increase in cash reserves to N13.81 trillion, constituting 21.6 percent of total customer deposits.

Tier-1 banks experienced significant CRR growth, with UBA leading at 68.9 percent, followed by Sterling Bank with a 62.6 percent increase. Analysts argue that the current CRR, at 32.5 percent, is one of the highest in sub-Saharan Africa, hindering banks’ lending capacity and contributing to a high-interest rate environment.

Economists emphasize the need for stable exchange rates and fiscal stability to lower the CRR. They advocate addressing the volatile exchange rate, building foreign reserves, and allowing banks access to their deposits without the threat of CRR, ultimately fostering credit accessibility for the real sector.

In response to these challenges, suggestions include the MPC considering a reduction in the CRR at its next meeting, while the new CBN management’s emphasis on Open Market Operation (OMO) may lead to a decline in reliance on the CRR and liquidity ratio.