Tuesday, February 25, 2020 / 08:54AM / United Capital Research / Header Image Credit: Naija247news

The currentera of policymaking, by the Central Bank of Nigeria (CBN), can largely becharacterized as unorthodox. Outlining the recent policy pronouncements by theapex bank, the highlights include; increase in the minimum requiredLoan-to-Deposit ratio to 65.0%, the exclusion of local non-bank corporates andindividuals from the OMO market, the mandated reduction in transaction feesacross various services, and the hike in Cash reserve requirement (CRR) from22.5% to 27.5%. While these policies are tilted towards driving credit to thereal sector, the impact has been divergent across different segment of thefinancial market.

Although noofficial document has been issued by the CBN, Business day newspaper publishedan article on Monday, 24th February revealing some of the key highlightsof the Bankers' committee meeting which held on Friday, 21st Feb-2020. Anotable point is what can best be described as the exclusion of banks from theOMO market and a likely penalty in the form of CRR increase to 30% - 40%, ifviolated. By all indications, the body language of the CBN and the policypronouncements have strongly reinforced the commitment of the CBN to defend theNaira and promote real sector growth.

Specifically,the new directive clearly allows the CBN to mop up liquidity at zero cost whileretaining FX inflows from FPIs through the OMO market. However, this is at theexpense of the banks. Thus, we cannot but consider the possible cobra effect ofthis directive, as foreign investors might be turned off by the uncertaintiesin the regulatory environment resulting in a net-capital outflowwhich may force the CBN to do the inevitable. 

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