State governors are demanding that a whopping $2 billion be distributed from the Excess Crude Account (ECA), a move that would further deplete the buffer created for the rainy day.
This is as the Central Bank of Nigeria (CBN) increased the Cash Reserve Requirement (CRR) in a strategic move aimed at reducing funds at banks' disposal.
At the end of the 277th Monetary Policy Committee (MPC) meeting in Abuja yesterday, the CBN said it has increased banks' CRR to 12 per cent from eight per cent, thus tightening liquidity in the financial sector.
CBN Governor, Malam Sanusi Lamido Sanusi, said the persistent depletion of the ECA by the tiers of government posed ominous signs for the domestic economy in view of lower domestic output growth, build up of inflation pressure, slowdown in accretion of external reserve and attendant pressure on exchange rate as well as possible shortfall in projected revenue for 2012.
"The Committee observed further that during 2008-2009 when oil prices declined sharply and the domestic currency came under intense pressure, the CBN was able to defend the Naira because the nation had buffers, having accumulated substantial foreign exchange reserves when oil prices were high, but that this time around that luxury does not exist, as the excess crude account has largely been depleted, and is still being depleted by the tiers of government."
He said that increasing the CRR was in line with efforts made by the apex bank to ensure price stability in the money market.
He added that the committee was faced with a serious challenge of lowering the MPR but felt that lowering it in the face of the slow growth output and global growth prospect would weaken the exchange rate.
Sanusi noted that it would also adversely affect the reserve, especially now that the country needed to build buffers against external shocks.
He added that leaving the MPR unchanged was also against the backdrop of the upward inflation forecast by the bank.
"Inflation is expected to average 12.0 per cent during the next six months with core and food inflation being much higher.
"The forecast is mainly due to the increase in electricity tariff and the tariff on imported rice and wheat," he said.
He allayed fears that liquidity tightening would reduce banks' lending to the economy maintaining that significant liquidity on the banks' books have not resulted in more lending to the real economy.
Rather, he said, the excess liquidity has provided banks with ammunition for speculative activity in the foreign exchange market with grave implications on inflation.
"It is important to note that the significant liquidity on the books of banks has not led to intermediation and lending to the real economy. Banks have continued to take advantage of high yields on government securities to direct credit away from the core private sector. In addition, the liquidity has provided ammunition for speculative activity in the foreign exchange market with implications for inflationary expectation."