CBN moves to shield Nigeria from global credit crunch

THE Central Bank of Nigeria (CBN) has allayed fears that the recent rumblings in the global financial system could take a toll on the country's economy.

Citing a healthy foreign reserve component, stable micro and macro economic policies coupled with a strong banking sector, the apex bank said yesterday that investors and even ordinary Nigerians have no cause to worry over happenings in the international economy.

Although the CBN admitted that Nigeria is not entirely insulated from global occurrences, it said that sound measures have been put in place to absolve any of such shocks. Such measures include a cut in interest rate to enhance liquidity in the economy.

CBN Governor, Prof. Chukwuma Soludo, told journalists after the Monetary Policy Committee (MPC) special meeting in Abuja yesterday that "despite the recent threats to the global financial system, Nigeria's foreign reserves are safe. The banks are safe and sound. There is really no cause to worry much. All indicators show that the economy is well."

Finance Minister Shamsudeen Usman, also spoke on efforts to stabilise the economy, particularly the capital market yesterday when he hinted that the Federal Government must have shelved the idea of providing share stabilisation funds and combat the current bears dominance in the equities sector of the Nigerian Stock Exchange (NSE).

Usman, who spoke with journalists in Lagos, explained that the government has resolved to use market-oriented measures such as share buy-back to refuel the market.

Besides, he said the Monetary Policy Rate (MPR), Cash Reserve Ratio (CRR), and Liquidity Ration (LR) have been reduced to enhance liquidity in the capital market.

Soludo buttressed this when he said that the MPR had been cut by 500 basis points from 10.25 per cent to 9.75 per cent to shield the economy from the global credit-crunch.

Early this week, one of the United States (U.S.) largest banks, the Lehman Brothers, crashed like the Merry Lynch and others before it, a development which has sent jitters across America and Europe with the U.S. government initiating frantic efforts to bail out one of its largest insurance groups, the AIG, with huge funding.

The CBN chief said the decision to cut interest rate was one of the key strategies agreed upon to liquidify the system.

Also the CRR was reduced from four per cent to two per cent, with immediate effect; and the liquidity ratio from 40 per cent to 30 per cent. The apex bank only recently in what it explained as efforts to control inflation increased the CRR as part of strategies to mop up money in circulation.

The CRR is the least deposit funds banks are required to keep with the CBN as part of security against unpredictable happenstance. Its increase would require banks keeping more money with the apex bank while its reduction means making more funds at the disposal of commercial banks.

Indications that the CBN had changed strategy in its monetary policy posture first showed late July when after its MPC meeting for that quarter, it retained the MPR at 10.25 per cent, thus confounding economic watchers, who were used to the frequent upward adjustment of the MPR that modulates lending rate.

Soludo said the CBN would continue to monitor developments in both domestic and international economies and would be on the alert to take necessary steps to ensure the smooth functioning of the financial markets and the economy in general.

To lay credence to his assurances, he disclosed that the nation's foreign reserves are as high as $63 billion, representing about 16 months of total foreign exchange disbursements, adding that "Inflow of foreign investments remained strong at about $8.5 billion by the end of August 2008, compared to $5.8 billion for the corresponding period of 2007.

"In order to lubricate the system, the MPC has decided to ensure that the financial system remains liquid. The MPC accordingly, decided to reduce the Monetary Policy Rate (MPR) from 10.25 per cent to 9.75 per cent; reduce Cash Reserve Ratio (CRR) from four per cent to two per cent with immediate effect; reduce the liquidity ration from 40 per cent to 30 per cent; allow repo transactions against eligible securities for 90 days, 180 days and 360 days," he said.

The CBN would also now buy and sell securities through the two-way quotes.

Soludo, who explained that the special MPC meeting was held to review the stance of monetary policies in the light of the evolving economies and financial developments in the world economies, maintained that Nigeria could not afford to be unmindful of the international financial developments.

He reeled out further details from the meeting. "The committee noted that while headline inflation and food prices have been on the increase, core inflation has been in single digit. The outlook on output for 2008 is strong, with non-oil Gross Domestic Product (GDP) growing at over eight per cent. The committee acknowledges that growth in M2 and credit to the private sector have been high. Credit to the core private sector grew at 70.6 per cent yearly rate by end of August 2008. However, the increase in interest rates in August was mainly due to pressure of liquidity in the financial markets in general and in the inter-bank market in particular.

"The financial crisis has slowed down the industrialised economies. Reflecting the sharp fall in demand, crude oil prices have been softening in the international markets in recent weeks (below $100 per barrel), even as consumer inflation continues to be relatively high in relation to target levels. The policy makers in these countries are at present concerned mainly with managing risk in the financial sector and reviving growth," Soludo said.

He took the same message yesterday to the National Institute of Policy and Strategic Studies, (NIPSS) in Kuru, near Jos, Plateau State, where he told reporters after addressing course participants, that though there had been a fall in the market value of stock and shares but that the prices in most of the sectors were still higher than their initial value.

He said the current dip in the value of shares was due to a panic created by shareholders who were anticipating a further appreciation of the value of their investments, noting that when that did not happen, most of them began to withdraw from the market.

The CBN boss said the reality is that most of the stocks still offer prices that triple their value during their initial public offers, which shows that the stock market is only responding to the vagaries of market forces.

On his part, Usman advised investors that this is the time to buy shares in the stock market, assuring that the market will soon bounce back.

"The stabilisation fund has been taken care of, as share buy-back has taken care of it. We believe the market will soon begin to respond to these measures later. My hope is that the market will rebound soon, but, it might take some time. It will rebound faster than we expect."

The minister said that the Federal Government intervention in the market has helped to hedge against the persistent fall in share prices.