Godwin Emefiele, CBN Governor: loosens monetary policy

Nigeria’s central bank loosened monetary policy on Tuesday by injecting liquidity into banks, in a bid to stave off recession in Africa’s biggest economy, which has suffered as oil prices fell.

The Central Bank of Nigeria kept its benchmark interest rate on hold at 13 percent but cut banks’ cash reserve ratio to 25 percent from 31 percent, a move that should allow them to lend more to factories and businesses, Governor Godwin Emefiele said.

Nigeria  has been hit by a drop in oil revenues, the main source of funds for the state budget and imports of basic food items.

Many civil servants have not been paid for months, and Nigerian companies have struggled to get dollars to pay suppliers after the central bank imposed foreign exchange restrictions.

“Having seen two consecutive quarters of slow growth, the committee recognized that the economy could slip into recession in 2016 if proactive steps were not taken to revive growth in key sectors of the economy,” Emefiele told reporters in Abuja.

He said the bank would stick to foreign currency curbs to encourage local production of essential food items.

Liquidity on the interbank market has dried up since authorities last week forced commercial banks to move government revenue to a Treasury Single Account (TSA) at the central bank, part of a drive by President Muhammadu Buhari to fight graft.

Buhari has said he wants to diversify the economy but has faced criticism for failing to name a cabinet since taking office on May 29, leaving the central bank to deal with frustrated foreign share and bond investors.

JP Morgan is kicking Nigeria out of a key bond index, citing a lack of liquidity and transparency in the currency market.

“No organisation has been exempted from the TSA,” Emefiele said, denying Nigerian press reports about alleged exemptions to relieve the pain being felt by banks.

Emefiele said the banks were in good health despite the deposit removals, whose volumes he declined to specify. Analysts have estimated up to 1.2 trillion naira ($6.03 billion), or 10 percent of banking deposits, may be sucked out of the financial system.

He said the bank had cut the reserve ratio to stimulate growth amid falling industry output and rising unemployment. Economic growth dropped to 2.35 percent in the second quarter from 6.54 percent a year earlier.

The vote to cut the cash reserve requirement from 31 percent was by seven to three votes of the monetary policy committee, Emefiele said. The vote to leave its main rate unchanged was unanimous.

*Reuters