By Oludare Mayowa
The International Monetary Fund (IMF) on Thursday advised Nigeria’s central bank to abolish the use of Cash Reserves Ratio (CRR) as a monetary policy tool for liquidity management and replace it with more market-friendly instrument.
In a statement after its staff virtual visit to the country, the Fund said the Central Bank of Nigeria (CBN) should rather adopt the use of government short-dated treasury bills to control system liquidity.
IMF said the CBN should strengthen its monetary targeting regime by integrating “the interbank and debt markets and using central bank or government bills of short maturity as the main liquidity management tool, instead of the cash reserve requirements.”
The IMF position was in alignment with the World Bank recommendation this week that the CBN should “phase out excessive reliance on the cash-reserve ratio as a high-frequency liquidity control tool and an instrument to finance quasi-fiscal CBN operations.”
The CBN currently asks banks to set aside 27.5 percent of their deposit liabilities in a bid to force banks to lend to the private sector and stimulate economic growth.
The Brettonwood institutions are also in alignment with their recommendation to the CBN on the extension of overdraft in form of Ways and Means to fund government budget deficits.
According to the IMF mission, Nigeria should keep its reliance on CBN overdraft for deficit financing within legal limits, which is stipulated at 5 percent of the previous year’s government revenue.
The finance minister had put the overdraft provision by the CBN to finance government budget at around N11 trillion and promised to securitise the outstanding debt to the regulatory bank.
“The mission urged the authorities to keep reliance on CBN overdrafts for deficit financing within legal limits, while the government continues to make efforts to strengthen budget planning and public finance management practices to allow for flexible financing from domestic markets and better integration of cash and debt management,” the statement added.
The CBN had directly financed one-third of the federal government’s fiscal deficit in 2020 through measures that included extensive use of overdrafts exceeding its charter’s statutory limit of 5 percent of the previous year’s government revenue.
The IMF also wants the government to step up efforts to strengthen tax administration to mobilize additional revenues and help address priority spending pressures.