Federal Government Initiates N5 Trillion Cash Mop-up to Tackle Rising Inflation

Efforts by the Federal Government to combat the escalating inflationary pressures will result in a significant cash mop-up of N5 trillion from the banking industry, as the Central Bank of Nigeria (CBN) implements a hike in banks’ Cash Reserve Ratio (CRR) to 45 percent.

The CRR, representing banks’ cash reserves for meeting cash obligations, has been increased from 32.5 percent to 45 percent in a bid to curb inflationary trends.

In a virtual meeting with foreign portfolio investors (FPIs), organized in collaboration with NGX Group, CBN Governor Mr. Olayemi Cardoso and Deputy Governor Mohammad Abdullahi addressed concerns over recent reforms in the foreign exchange market and the 400 basis points hike in the Monetary Policy Rate (MPR).

Abdullahi revealed that the banking system faces a shortfall of N5 trillion to meet the 45 percent CRR requirement. However, he assured that the implementation of the new CRR would be phased to avoid disruption to the industry. Banks exceeding the 45 percent CRR will be refunded the excess, while those with shortfalls will need to build up their cash reserves.

The estimated N5 trillion cash mop-up, representing outstanding system liquidity in excess of the initial CRR range, is expected to impact bank liquidity adversely. Financial analysts attribute the decision to tighten monetary policy to rising inflation, which has reached 29.9 percent year-on-year, the highest since 1999.