TSA Implementation: CBN May Relax Monetary Policy

The anticipated full implementation of the Treasury Single Account (TSA) is expected to see the Central Bank of Nigeria (CBN) relax its restrictive monetary policy stance, especially by slashing the cash reserve requirements (CRR), experts have stated. The CRR is the minimum cash, as a percentage of customers’ deposits and notes that each commercial bank must set aside in reserve. This cash cannot be used for other purposes or lent out. It is currently at 31 per cent. Nigeria has the highest CRR in Africa. The central bank has over the years, used this instrument to sterilise a substantial amount of funds. President Muhammadu Buhari last week ordered all federal ministries, departments and agencies (MDAs) to pay all government revenues and other receipts into a TSA with the central bank. The federal government said the move was aimed at promoting transparency and facilitating compliance with Sections 80 and 162 of the constitution. The TSA is a unified structure of government bank accounts enabling consolidation and optimal utilisation of government cash resources. It is a bank account or a set of linked bank accounts through which the government transacts all its receipts and payments and gets a consolidated view of its cash position at any given time. The central bank had in the past three years hinged its tight monetary policy decisions on the excess liquidity in the banking system as a result of government funds being held by banks. But analysts at CSL Stocbrokers Limited, noted that the full compliance with the TSA directive implies improved monitoring of government funds, “which we expect will boost reserves and may result in the CBN relaxing its strict cash reserve requirement policies.” Also, speaking in an interview with THISDAY on Monday, the Chief Executive Officer of Proshare Nigeria Limited, Mr. Femi Awoyemi, stressed the need for the central bank to reduce interest rate, slash the CRR and also strenghhten its supervisory role. He also argued that it was important that the country’s banking model is restructured in view of the TSA. “It is imperative that we reverse our banking model back to what it used to be. And if we want to do that, the CBN, which is a beneficiary of the TSA, which

allows it to exert significant influence over monetary policy, must change three things : its interest rate position, reduce its cash reserve ratio and most importantly, improve its supervision of banks,” Awoyemi explained. However, he pointed out that in doing so, the central bank must also create the opportunity to help the banks manage the transition to the TSA system, saying that because commercial banks had over the years been used to government funds, the policy might have some effects on their operations. “The withdrawal of these funds will cause a major shift in how they (banks) conduct business and they need to adjust to the new liquidity level. “So, the central bank must relax interest rate because right now, all the monies are going to be with the government and there won’t be huge borrowing cost for the government. In fact, there is no incentive for the government to price its treasury bonds far higher anymore,” Awoyemi stressed.