CBN’s 65% LDR Could Inject Fresh N2.17tr Loans Into Economy- MPC Member

  • Another Urges Sale Of Idle Govt Assets, Boosting Power Generation

A member of the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC), Aliyu Rafindadi Sanusi, says the apex bank’s decision to further hike Loan-to-Deposit-Ratio of the nation’s deposit money banks to 65% by the end of this month, from 60% by September 30, could result in N2.17tr additional credit flows between November and end of December 2019.

According to personal statements of MPC members at their meeting of November 25 and 26, the last for the year, published by the CBN, Sanusi said the expected new loans to be created will be in addition to the N1.17tr created in the five months between the end of May and October 2019. Within the period, he noted data showing a 13.08% growth in credit to the private sector at the end of October 2019, from 12.49% in the preceding month.

A breakdown, he said, showed that between May when the CBN directed deposit money banks to raise LDR to 60% and September, the manufacturing sector received N459.69bn, representing 39.29% of the N1.169tr new loans created. It was followed by the Retail & Consumer sector with N355.11bn; General Commerce got N142.98bn; ICT, N82.07bn; Construction, N74.52bn; while Agriculture & Forestry received a total of N73.2bn, among others.

“A review of the banking system stability report showed some encouraging signs that the various policy actions during the course of the year were yielding the desired results. For instance, the combined effect of the GSI, which reduced the default risk and improved chances of debt recoveries, and the LDR guidelines, incentivized banks to resume lending to the real sector,” he stressed.

The creation of new loans by banks, the MPC member continued, has been helped by data showing a sustained decline in Non-Performing Loan (NPL) from 9.4% in July and August 2019 to 6.56% in October 2019, as against 14.05% in October 2018.

He attributed the significant drop described as a welcome development, largely to recoveries, write-offs, and disposals, which could further encourage bank lending.

The rise in inflation, which is clearly the result of supply constraints arising from the border closure, he believes, “could be reversed by the increased output growth supported by credit flows to the real sector. The border closure provides an opportunity for increased demand for good-quality lending from firms as they attempt to raise output in response to price signals.”

Data from the CBN’s Purchasing Managers’ Index, he added, seems “to support this.”

Mrs. Aishah Ahmad, a committee member and deputy governor of the CBN, believes the hike in LDR has beyond making additional credit available to the private sector, and spurring growth in Q3 2019, created a number of other positive effects. For example, she noted, “the renewed focus on lending by banks has created competitive pressure, which is driving a reduction in market lending rates, enhancing affordability and creating demand for loans.

“The new credit has been primarily in manufacturing, agriculture and consumer lending which is helping to diversify bank credit portfolios which have hitherto been heavily concentrated in oil and gas.”

This she noted further, can be seen in the reduced contribution of oil and gas to total loans at 27.4%, while manufacturing grew to 16% at the end of October 2019, from 30.41 and 14.68% respectively at the end December 2018. The reduction in credit to oil and gas and FGN payments of outstanding obligations in this sector, she explained, is also helping to reduce risk, driving the sector NPLs down from 20.76 to 5.39% of industry NPLs from end-October 2018 to end October 2019.

Festus Adenikinju, another member in his personal comment expressed hope that the NPL decline in NPL would continue despite the rise in LDR, noting the decline in total operating cost to operating income of banks from 67.4% in August 2019 to 66.9% in October 2019.

There is no doubt, he argued, that “the economy is in a need of an urgent and deep boost if it is to grow at a far more decent rate that will dent the current high unemployment and poverty rates in the country.

For him, therefore, the government must take bold steps by selling idle government assets to improve the nation’s financing; promoting domestic gas utilization and gas-based industries to diversify dependence on oil exports, while boosting electricity generation. Others include finding alternative funding of government capital projects, using the private sector funding to reduce pressure on government budget; reforming energy subsidies in the oil and electricity subsectors; as well as enacting oil sector reform law.

Adenikinju, a Professor of Petroleum Economics at the University of Ibadan, Oyo State, lamented the deteriorating fiscal space due to the rising fiscal deficit, with the recurrent underperformance of government revenue relative to budget, while expenditure continues to grow about the budgeted sum by the first half of the year.

For Edward Lametek Adamu, a deputy governor of the CBN, who is also a member of the committee, this is why it is important for the “government to maintain the focus on diversifying the economic base and growing revenue.

“It is especially relieving that the process of the 2020 budget has very well advanced which means implementation could begin much earlier than previously experienced. This should accord economic activity and growth recovery the much-needed push in 2020,” he added.

Prof Mike Obadan, in his personal comment, agrees on the need for greater diversification of the Nigerian economy and interventions that would stimulate growth needed to “reduce the very high rate of unemployment and make a dent on the high incidence of poverty.

He expressed worry at the serious revenue challenge that the country is currently facing with attendant high fiscal deficits at N3.466tr in the first three quarters of 2019, especially given “its implications for debt accumulation and inflation.

To finance this deficit, the government, he continued, “issued FGN bonds amounting to N670bn, thus leaving a net overall deficit of N2.796tr which may have been financed through inflationary sources.

Although the government’s current efforts to step up domestic revenue mobilisation by hiking Value Added Tax from 5.0 to 7.5% are in the right direction, he called for “a hard look at the structure of recurrent expenditure with a view to rationalizing it and achieving some cost savings.”

This is because, in his words, a “growing fiscal deficits not only lead to debt accumulation and crowding out of the private sector in the financial markets it also undermines monetary policy effectiveness.”