Daily Independent Online.
*
Tuesday, August 24, 2004.
CBN reduces public funds withdrawal
• Withdrawal done to check spiraling inflation
By Joseph Sesebo (Lagos)
and Sanya Adejokun (Abuja)
Desire by the Central
Bank of Nigeria (CBN) to check galloping inflation, which stood at about 19.4
per cent at the end of May, informed its current withdrawal of public sector
funds from banks.
It announced on
Monday, however, that the original amount to be retrieved has been reduced so
as not to trigger distress in the banking system.
The CBN has already
withdrawn N11 billion and still intends to retrieve another N13 billion. The
original plan was to recall a total N74.5 billion, about 50 per cent of the entire
public funds kept with the banks.
CBN Head of Corporate
Affairs Tony Ede confirmed in Abuja that the apex bank took a second look at
the policy after discovering that most banks are already experiencing serious
cash crunch following the initial withdrawal of N11 billion.
But it would still
withdraw the balance N13 billion in the accounts of the Nigerian Petroleum
Technology Development Fund (NPDTF) and Bureau of Public Enterprises (BPE). Of
the amount, N12 billion belongs to the NPDTF, the BPE has N1 billion.
These two institutions
had N20 billion and N3 billion with the banks before the directive to retrieve
the money and send it to the CBN.
The N3 billion
belonging to the Nigerian Telecommunications Limited (NITEL) will not be
withdrawn as it is tied as collateral for a loan.
Likewise, the N46
billion belonging to the Nigeria National Petroleum Corporation (NNPC) will no
longer be withdrawn “in the meantime”, Ede said, because of the signs of distress
already noticed in the banking system.
A CBN source explained
that the need to control inflation had necessitated the withdrawal, and
insisted that the intention is not punitive but a monetary policy.
According to him, the
option was thoroughly debated before it was adopted.
The CBN had, in its
monetary policy guidelines for this year, said Open Market Operation (OMO), an
instrument for managing liquidity in the economy, would be used if the need
arises.
The bank thought about
using OMO to withdraw the over N150 billion public funds in the system, but
that idea was discarded upon careful analysis. The thinking was that most
banks, which harbour the funds in their vaults, would literally cast a passing
glance at treasury bills which would have been floated by the CBN to mop up
excess liquidity.
The reason is that the
rate at which the bills would have been offered would not attract a rate above
13.5 per cent, since the minimum discount rate (MRR) was about 14.5 per cent.
Besides, the on-going
deposit rate in the market stood at a band of 21 per cent to 23.5 per cent. No
bank would, therefore, invest in an instrument that would attract a rate lower
than the MRR and the going rate in the inter-bank market.
The CBN considered the
withdrawal of the funds from the banks but discovered that it would throw many
of them into a tailspin as many banks were unduely exposed to public funds in
their keep.
“Indeed many
banks had over 90 per cent of their deposits as public sector funds and a
massive withdrawal of such funds would mean the collapse of such banks”,
explained the source.
The next option was to
do a vulnerability index, which measures the ability of each bank to survive if
the funds were withdrawn.
“It was discovered
that many banks would collapse. And the essence of the policy was not to
penalise customers who had deposits in such banks. So it was thought that the
apex bank was not ready to live with the collapse of banks where customers will
not get their deposits”.
The third option was
to tell government agencies to withdraw certain percentages of their funds.
Four were chosen to reduce the shock. These were the BPE, the NNPC and the
NPTDF.
The combined value
from these institutions was estimated at over N74 billion, about 50 per cent of
the funds saved up with the banks.
