Foreign investors’ patience with Cardoso wears thin as reforms stall

Foreign investors’ patience with Olayemi Cardoso, governor of the Central Bank of Nigeria (CBN), is wearing thin over his reluctance to discontinue the apex bank’s punitive bank rules and raise market interest rates.

Cardoso, who was appointed last year, promised structural reforms at the CBN, but the pace of the reforms has been slow and indeed painful for not only investors but the wider economy.

One area requiring long-awaited reform is the CBN’s arbitrary cash reserve ratio (CRR) debits on banks.

Cardoso had called the arbitrary CRR debits on banks by the CBN “silly” during a conversation with some investors last year, but the practice, which the CBN uses to mop up liquidity in the banks, has only intensified.

He did confirm last year, during a rare public address delivered at the Chartered Institute of Bankers of Nigeria’s (CIBN) annual dinner, that the CRR debits had been sustained, and that helped reduce liquidity in the entire banking sector to under N100 billion in November.

The rush by banks to offload spare naira cash before it gets taken by the CBN has created distortions in the market and has contributed to the artificially low market rates, which is a concern for investors.

“The confidence in the new governor is starting to wane,” one foreign investor said. “With Nigeria, it seems the more things change, the more they stay the same; sometimes the new governor is no different from the old.”

Godwin Emefiele, whose suspension as CBN governor last year paved the way for Cardoso’s appointment, was notorious for using the CRR debits to mop up liquidity in the banking system.

The official CRR rate hit a peak of 32.5 percent during Emefiele’s tenure, but the effective rate was around 50 percent, according to multiple banks who spoke to BusinessDay at the time.

The arbitrary debits have continued under Cardoso, who, like Emefiele, aims to rid the banks of naira to reduce pressure on the currency. But it comes at the cost of creating market distortions.

The punitive measure, which means banks must park over 32.5 percent of their deposits with the CBN at zero returns, also affects the sector’s profitability.

“The debits are distorting the market and have made interest rates artificially low,” another foreign investor who spoke to BusinessDay said.

The low-interest rate on Treasury bills is another source of concern for foreign investors.

The interest rate on the apex bank’s liquidity mopping tool, OMO, has gone up since Cardoso’s appointment, but that’s not enough, according to the investors, who say the rates on T-Bills also need to be adjusted upward for the country to attract meaningful dollar supply to ease acute FX shortages.

The one-year Treasury bill sold for 12.24 percent at last month’s auction on January 10, less than half of the country’s inflation rate, which the National Bureau of Statistics reported hit 28.92 percent in December, a 20-year high.

This means investors in the one-year T-bill will be booking a negative real return of 16.68 percent, the worst among African peers from South Africa, which has a positive real return of 4.2 percent, to Egypt, whose negative return of 7.3 percent is still better than Nigeria’s.

The CBN has been aggressively raising interest rates and there are expectations that there will be yet another increase at the next Monetary Policy Committee (MPC) meeting in February.

The MPC meeting, which will be the first under Cardoso, will be watched keenly by investors seeking clarity about the CBN’s plans to stabilise the naira, which has fallen sharply in the more accessible parallel market.

The naira closed at a four-month low of N1,380 per US dollar at the parallel market on Wednesday, according to data collated from multiple traders.

“I think the MPC meeting will disappoint because it is not the place to announce structural reforms; it’s a rate-setting meeting,” another foreign investor said.