50% CRR on Public Funds? I don’t get it.

It sounds weird I know. Federal parastatals apparently have about N1.3tn sitting in banks, probably at 0% interest rate. The Banks then turn around and give loans to the FG at about 14%. Sounds interesting I know. Too interesting that the CBN has decided to act and reign in this “perverse behaviour” by doing something. In this case the “something” is to raise the CRR on public funds from 12% to 50%, meaning banks must keep at least 50% of public funds in reserve. The goal apparently is to get banks to not lend so much to the FG, and lend more to the private sector.

But raising the CRR on public funds probably won’t boost private sector lending. If anything I would expect the rates that the FG pays to go higher than the current 14%. See the thing is the government is basically a risk free borrower who doesn’t care what the rates are. Government officials who expect to be out of office in 2 – 6 years tend not to care about interest rates and will probably gladly pay more than 14%. In my books raising the CRR just makes the “perverse behaviour” even more perverse.

How about the private sector? Will raising the public CRR boost private sector lending? I don’t think so. I don’t see how reducing the funds that banks have at their disposal will somehow make to them lend more to the opposite-of-risk-free private sector. If anything I would expect higher rates to the private sector as well. In my books this is one of those something-is-wrong-so-lets-do-anything policies that in the end does nothing.

Of course the reality could be that this is just another monetary tightening exercise. Perhaps the CBN wanted to raise the MPR again in anticipation of election spending but didn’t want to deal with the political backlash. Now that story makes more sense.

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