KEY POINTS
- The Central Bank of Nigeria (CBN) mopped up N7.6 trillion from the financial system to tighten liquidity.
- The move aims to curb inflation and stabilize the naira.
- Analysts warn that reduced liquidity could impact lending and business growth.
The Central Bank of Nigeria (CBN) has pulled out a whopping sum of N7.6 trillion from the circulation in the country’s financial market in a bid to tame inflation and support the local currency. This is a major step by the CBN in its bid to continue to mop up excess liquidity in the economy which it believes is fueling inflation.
Fighting inflation and stabilizing the Nigerian currency
The mop-up operation is being undertaken by the CBN at a time when inflationary pressures are rising in Nigeria as prices of goods and services have started surging.
This way, the central bank believes that it can ease these pressures and halt further devaluation of the naira. Monetary accommodation has been an important driver of inflation, and this action is viewed as needed to bring stability to the economy.
BusinessDay reports that the CBN’s action is intended to stabilize the naira that has been under pressure from global economic factors and domestic fiscal issues.
This speculated to enhance the value of monetary unit in a given country hence reduce volatility by the side of cross rates with other currencies such as the US dollars.
Possible effects on credit and business development
However, the mop-up aimed at restoring stability in the money markets may have side effects on the overall economy. When more money is locked up in business, spending may be reduced in the financial system leading to high lending rates which are troublesome to the business.
Economists who participated in the poll said that if it persists, tighter liquidity will cause companies to rein in their spending, a development that can harm growth; this is especially so for SMEs since they fund their operations through loans.
Accordingly, the CBN policy may exert higher pressure to ensure that financial institution becomes profitable again, and this in turn affects the interest rate and lending strategies.
Some organizations may have to prepare for more stringent financial environment, which can affect its future and current strategies fixing on capital requirements for business development and working capital.
Sustaining stability and growth
The CBN has the problem of achieving both economic stability and business development. Although the mop up exercise is expected to tame inflation and support the naira, the restricted credit may slow down the economy in the short run.
Pundits are of the view that the central bank could need further support, including specific actions to accommodate the sectors most strangled by the liquidity crunch.
While the mop-up and its effects endure further, the Nigerian business community will be awaiting to see how the CBN balances these two concerns in the coming months.
