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You are here:Home>>Strategic Research & Analysis>>NIGERIA: LIQUIDITY MANAGEMENT ASSESSMENT BY IMF
Sunday, 27 October 2013 13:10


Written by International Monetary Fund (IMF)
Nigerian Central Bank Governor Sanusi Lamido Sanusi (L) during a joint press conference December 20, 2011 in Lagos, Nigeria  WITH Christine  Lagarde, Managing Director of IMF. Nigerian Central Bank Governor Sanusi Lamido Sanusi (L) during a joint press conference December 20, 2011 in Lagos, Nigeria WITH Christine Lagarde, Managing Director of IMF. imf


In Nigeria, structural liquidity is more likely to be volatile over time for various reasons. Oil receipts and related foreign exchanges sales of oil companies are expected to

remain strong, given high oil prices and large proven reserves for oil and gas, and volatile.  The lumpy nature of the disbursements from the Federation Account is also important

factor for variation in liquidity. Given that the surplus liquidity is probably more related to foreign exchange inflows during oil booms, one might argue for more sales of foreign

exchange and less issuance of domestic debt. The result should be a slightly strong naira and slightly lower interest rates. In this volatile environment, there is an on-going

challenge to manage systemic liquidity consistent with the announced policy stance. To align systemic liquidity with the policy stance, the adjustment measures should be based

on medium-term forecasts of banking system liquidity. The CBN also needs to recognize the trade-off in sterilizing a unit of spending from oil receipts: cost is either in terms of

higher interest rates if used Open Market Operations (OMOs) or an appreciated exchange rate if foreign exchange sales are applied. In either case there is likely to be a cost to

the tradable sector of the economy. The goal should be to seek the ‘least cost’ mix of sterilization.


Despite improvements in liquidity management framework, markets appeared, at times, confused about the signals sent from use of specific instruments. For

example, in October 2011, the CBN responded to pressures on the currency and prices by hiking the MPR by 275 bps and doubling the CRR to 8 percent. Then, the CBN

immediately reversed the impact of these measures by purchasing nearly two trillion of the Assets Management Corporation of Nigeria (AMCON) bonds and thereby injecting

substantial liquidity in the intervened banks.


The recent frequent use of the CRR as instrument needs to be rationalized.

Changes to the CRR require banks to make abrupt adjustments in their portfolios and as a consequence can induce volatility in financial market prices. The CRR is best used to

create a stable demand for reserves consistent with the level of systemic liquidity. Some countries have used high cash reserve ratios mainly to sterilize substantial capital inflows

in the context of managed foreign exchange rate regimes (e.g., China and Brazil). However, most countries keep this ratio low and stable. An increase in the CRR, particularly

when it is unremunerated, imposes additional costs on banks, which then get passed on to the economy in the form of wider interest rate spreads. It is estimated that where

banks have constant costs per unit of deposit, a 2 percent increase in the level of the CRR adds approximately 0.5 percent to the spread between deposit and lending rates

(Appendix 2). Therefore, changes in the ratio should be infrequent and made only when there is a strong reason not to use market-based instruments (i.e., Government/CBN

securities and foreign exchange sales).


Reserve averaging is particularly useful for the banking system where liquidity forecast errors are large.

The RA provides banks room to manage their liquidity and comply with CRR using the average of end-of-day balances over the maintenance period (often between two weeks

to a month). It helps reduce daily volatility in the overnight rates because banks do not have to immediately adjust for a deficit in their CRR account. As banks need to manage

their CRR balances over a period (instead of at the end of every day), any forecast errors or changes in liquidity supply has a weaker impact on short-term interest

rates, as observed during March-October 2011. However, the RA provides banks an opportunity to take larger positions in the interbank market for part of the CRR

maintenance period by drawing their reserves down to zero. Such a behavior may destabilize the markets, particularly if cash reserve requirement is high (e.g., 10 percent or

more). However, the CBN could address such a concern by allowing partial averaging, which requires placing a minimum ratio of reserves that banks must adhere to at all times

(say half of the currently high CRR), while the overall CRR is subject to reserve averaging that is over a month long period to align the maintenance period with the distribution

of oil revenue.


Management of Short-Term Liquidity

The CBN has also sufficient instruments for short-term liquidity management. The Monetary Policy Rate (MPR) corridor serves as a signaling device for the monetary

policy stance. While use of the overnight facilities (Standing Deposit Facility and Standing Lending Facility) is at the banks’ discretion, the CBN is able to use repo operations and

outright transactions (e.g., 2-way quotes) to manage day-to-day liquidity and guide short term interest rates towards the MPR (Box 1). In addition, the CBN sells or buys

directly foreign exchange in the interbank market, in addition to pre-announced foreign exchange sales through WDAS, and is increasingly engaging in foreign exchange swaps

and forward contracts, which commenced in March 2011 and are growing. With few exceptions, the CBN has used these instruments effectively



AMCON Assets Management Corporation of Nigeria

BDCs Bureau de Change

CBN Central Bank of Nigeria

CRR Cash Reserve Requirement

ECA Excess Crude Account

FGN Federal Government of Nigeria



Federation Account Allocation Committee

Financial Markets Dealers Association

FSAP Financial Sector Assessment Program

FLAC Fiscal Liquidity Assessment Committee

LAG Liquidity Assessment Group

MPC Monetary Policy Committee

MPR Monetary Policy Rate

MDAs Ministries, Departments and Agencies of FGN

₦ Naira

NNPC Nigerian National Petroleum Corporation

NTBs Nigerian Treasury Bills

OBB Open buy back

OMO Open Market Operations

SDF Standing Deposit Facility

STA Single Treasury Account

WDAS Wholesale Dutch Auction System

US$ U.S. Dollar

Last modified on Sunday, 27 October 2013 13:29

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