Cablegate: Movement of Public Sector Funds, an Option For

This record is a partial extract of the original cable. The full text of the original cable is not available.

021223Z Apr 04



E.O. 12958: N/A

1. Summary: In its FY 2004-2005 Monetary Guidelines, the
Central Bank of Nigeria (CBN) stated its intention to move
public sector funds from commercial banks to the CBN as an
instrument of monetary policy. The CBN has advised banks to
restructure their deposit liabilities to avoid being caught
unprepared, and has said it will provide adequate notice
before making withdrawals. The proposed policy instrument
faces stiff opposition from the banking industry. Bankers
insist that public sector deposits are their lifeline,
particularly in an economy where personal savings are
relatively low, and say that the withdrawal of public sector
deposits will cause some banks to collapse. End summary.

The Policy

2. Along with other monetary policy measures, the CBN plans
to use the movement of public sector deposits into and out of
the commercial banking system as a means of controlling
liquidity. Funds may be withdrawn from or injected into the
system depending on prevailing monetary conditions and CBN
objectives. CBN officials say they will notify banks before
such movement of public sector funds, but they advise banks
to restructure their deposit liabilities to avoid adverse
effects of large-scale withdrawals.

3. The proposed policy measure faces stiff opposition from
the banking industry. Bank executives believe such action
will destabilize the system and cause some banks to collapse,
primarily because the banking sector relies heavily on public
sector funds in an economy where personal savings are
relatively low. The CBN's Deputy Governor for Financial
Sector Surveillance, Tunde Lemo, had argued while chief of
Wema Bank in 2003 that public sector deposits had become a
stabilizing force and warned that large-scale withdrawals of
funds would adversely affect many commercial banks. Lemo
recently made an about-face, arguing that "good banks" should
establish more branches and consider mobilizing other
deposits, particularly from small savers.

4. CBN officials insist they will not forswear use of the
proposed measure and have advised banks to invest their
public sector deposits in liquid short-term instruments that
can be converted to cash quickly and easily whenever the CBN
plans to withdraw funds. Ernest Ebi, the CBN,s Deputy
Governor for Policy, says President Obasanjo would prefer
that public sector deposits be permanently transferred to the
CBN; Ebi and other CBN officials recommended, however, that
funds be kept in commercial banks. Their core business, he
said, is deposit mobilization, and the CBN cannot perform the
function better than they can.

But No Result (yet)

5. On March 12, the CBN's Monetary Policy Committee (MPC)
announced a decision to tighten monetary policy by
withdrawing N40 billion ($294 million) from commercial banks
to reduce excess liquidity, or inflationary pressure, as the
economy is showing signs of modest economic recovery. The
MPC's Secretary, James Olekah, rationalized the withdrawal by
saying it was partially aimed at lowering interest rates.

6. The proposed withdrawal never occurred. Ebi confirmed
that the CBN was toying with the idea of withdrawing public
sector deposits but said the CBN reversed its March 12
decision after the Nigerian National Petroleum Corporation
(NNPC) and other government agencies withdrew significant
funds from commercial banks during the week of March 15. Ebi
cautioned that the CBN reserved the right to use the policy
instrument whenever necessary. CBN spokesman Tony Ede added
that the setting aside of N105 billion ($772 million) as
collateral for inter-bank clearing of checks by Nigeria's
seven settlements banks made large-scale withdrawals of
public sector deposits unnecessary at this time.


7. If the CBN's new policy instrument were to cause a handful
of relatively weak banks to close, Nigeria's banking system
might actually be strengthened. Some Nigerian banks seem to
do little else beyond storing and investing public funds.
Keeping the closures orderly and the depositors compensated
appropriately will be important. If the measure were to
successfully re-orient more viable banks away from reliance
on public sector deposits, it might prompt them to better tap
underutilized capital from other sectors of the economy for
deposits. In that event, Nigeria's largely under-serviced
informal sector could become increasingly important to banks'
bottom line.

© Scoop Media

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