There’s serious need for Public education in Nigeria as most people really need to understand the rot currently ongoing in Nigerian economy.
Understanding the current monetary policies of the CBN is something that needs to broken such that most people can understand.
Below is a didactic Analysis by Nefertiti :
For those who do not understand what is going on. I will try & explain the meaning of MPC, MPR, CRR & Liquidity Ratio.
WALK WITH ME & retweet for others.
Monetary Policy Rate or MPR is a tool employed by Central Banks, & it’s used to control the money supply in the economy, as well as the lending & inflation rates.
If a central bank is a mechanic, then screw drivers & spanners are the MPR.
The 150 basis points simply mean 1.5%.
Therefore, Yemi Cardoso’s Monetary Policy Committee (MPC) raised MPR by 1.5%. From 24.75% to 26.25% (24.75 + 1.5).
READ ALSO :A little Reminder of the Current Prices of some Commodities in Nigeria (pictures)
Raising the MPR could curb inflation & woo investors. Because investors like higher interest rates when they buy your government issued Treasury bills & Bonds
Right now:
Inflation rate is 33.69%
Interest rate is 26.25%
Investors stay away from a country when inflation rate is higher than interest rate.
But increasing interest rate from 24.75% to 26.25% will also lead to slower economic growth, lower consumer spending, & higher interests on loans. So it’s a double-edged sword.
The CBN is targeting inflation with this policy. But has it worked in the past? The answer is BIG NO! Emefiele tried it several times, & it kept failing. It won’t work on food inflation by the way. Food inflation in Nigeria currently sits at 40.53%.
The biggest driver of inflation in Nigeria is Food Inflation. Using monetary policy to target food inflation is counterproductive, because farmers cannot go to their farms.
You need to fix the supply side first, before the policies can work. Food inflation can only be tackled when farmers return to their farms. This can only happen when you fight insecurity to a standstill.
Again, raising Cash Reserve Ratio (CRR) to 45% means that banks are now required to retain 45% of customer’s cash deposits with the CBN.
So CRR is CBN debits to commercial banks. It means that First bank or Access Bank must keep 45% of your cash deposits with the Central Bank of Nigeria.
This way, banks will no longer retain huge amount of cash in their vaults to lend to customers. Therefore higher CRR discourages borrowing & lending at the same time.
Liquidity ratio is banks balance sheet, or health status. It tells you if a bank is able to pay off its debts & liabilities. Or if a bank has kwashiorkor.
Liquidity ratio is a bank’s (cash balance + assets) it can easily convert to cash; like vehicles & real estate. A healthy Liquidity ratio must always be maintained, because it measures the total liabilities of the bank, which are typically their customer’s cash deposits.
A liquidity ratio of 30% mandates banks to have current assets of up to 30% against their liabilities. Less than 30% shows that a bank is unhealthy.
“The Asymmetric Corridor of +100/-300 basis points around the MPR” simply means that the Central bank will lend to commercial banks at 27.25% (26.25 + 100). But it will borrow from commercial banks at 23.25% (26.25-300).
READ ALSO : The crime of Optimism & Hope for African Renaissance Via Peter Obi
Remember that when you see +100 basis points, it means 1%. And when you see -300 basic points, it means -3%.
By this. the CBN is telling the commercial banks not to keep their cash with the CBN & earn so little (23.25%). The CBN is telling the banks to go out there & find lenders in the real sectors so that the banks could earn higher interests.
If the Central bank wants to reduce the cash in circulation, it can adjust this corridor, then pay the commercial banks higher rates, & the banks will move their cash away from their vaults to the CBN, therefore the reducing the cash in circulation & inflation as well.
Did I try? I be JJC, no fex. 😅😅
About Author
