Post Views: 93 Flag 26% Exposure By Banks To Oil Sector Members of the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) say the nation’s ...
Flag 26% Exposure By Banks To Oil Sector
Members of the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) say the nation’s fiscal and monetary authorities must utilize this period of the Coronavirus (COVID-19) pandemic outbreak to recalibrate economic policies, including protecting foreign reserves.
At the MPC meeting, members voted by majority decision cut the benchmark Monetary Policy Rate (MPR) by 100 basis points to 12.5%, while retaining all other rates.
In their personal statements during the meeting held on May 25, 2020, members noted the need for a realistic and stable exchange rate that protects foreign reserves and support investors’ confidence in the economy.
According to Prof. Festus Adenikinju in his own statement, there is need for the fiscal authority (government) to see this as an opportunity to “significantly cut down on the costs of governance at all levels; permanently remove the oil subsidy and develop a framework for phased removal of electricity subsidy; passage of PIB (Petroleum Industry Bill) and similar legislations that will unlock productivity and growth across the economy; implement alternative financing framework other than the budget to fund infrastructural projects; expand tax coverage to enhance non-oil revenue; (and) sales of abandoned government properties across the country.”
Adenikinju also sought special incentives for companies “that do not lay off their employees as a result of Covid19 (which effects) will be with us for a long term. While most countries are slowly getting back to work, what is still not clear to most analysts is the nature of economic recovery: will it be a ‘V-shaped’, ‘U-Shaped’ or ‘W-shaped.”
In his own personal statement at the meeting, Edward Adamu, a member and CBN deputy governor agreed with Adenikinju on the need “to sustain and deepen extant foreign exchange management policies including strategic interventions in all segments of the FX market to ensure adequate liquidity, incentivizing autonomous inflows and prioritizing supply for imports of end products and intermediates that cannot be sourced locally.”
Consequently he said, there should be a periodic review of the list of items that are valid for official market funding, expressing optimism that with the right policies options, Nigeria’s economy may not go into a recession as a result of COVID-19.
Adamu, however, warned that increased uncertainty in the global economy could considerably shrink “external credit lines to corporates and banks in emerging markets and developing economies in the near-term.
“Capital reversals have already begun in many of these countries including Nigeria and stock markets could crash unless monetary authorities take deliberate steps to ease liquidity in domestic markets,” he added.
In crafting the desired monetary policies, the CBN deputy governor warned that thre is need to consider some other vulnerabilities and threats that the economy currently bears must be considered at this time.
One of these, he noted, is the price of crude oil, Nigeria’s most important export, whose crash forced immediate adjustments to the 2020 budget, even as he stressed the heavy exposure of the Nigerian banking system to the oil and gas sector.
“In April 2020, credit to the oil and gas sector accounted for about 26% of the industry’s total loans and advances, making the sector the single most important in terms of credit exposure of the banking system.”
Given the significant drop in oil price, Prof. Mike Obadan, in his own personal comment, argued that in the face of government’s challenging fiscal operations arising from the weakening of revenue generating capacity induced by COVID-19 pandemic, it is plagued by revenue shortage and the resultant increased fiscal deficits. This has resulted in “increased domestic and external borrowing and public debt build-up.
“As at March 2020, the Federal Government’s fiscal deficit stood at N1.392tr. With domestic borrowing through bonds,” Obadan noted.
Aishah Ahmad, another deputy governor and member of the MPC assured that the Nigerian “financial system remains a bright spot of the economy and is well positioned to support domestic output growth, and stimulate economic recovery.”
She assured that the CBN continues to monitor potential risks to financial stability, just as the financial soundness indicators remain strong, “despite the headwinds and rapid expansion of credit (gross credit increased by N3tr between end-May 2019 and end-April 2020), driven by the Loan to Deposit Ratio (LDR) policy.”
Another indicator of the soundness of the banking system, she noted, is the Non-performing loans (NPLs) ratio at 6.6% at end April 2020, compared with 11% at end April 2019, besides other prudential ratios that remain robust.
This resilience notwithstanding, she admitted that the industry remains exposed to shocks from spillover effects of the pandemic on macroeconomic conditions, which underscores the importance of regulatory measures to mitigate effects of the crisis. These include, according to her, “granting forbearance to banks to temporarily restructure loans for businesses and households most affected by Covid-19 and the Global Standing Instruction policy to limit NPLs.”
So far, Ahmad continued, “17 banks submitted requests to restructure over 32 thousand loans for individuals and businesses impacted by the pandemic, representing 32.94% of total industry loan portfolio, with the manufacturing and general commerce sectors constituting the bulk of the restructured facilities.”
To preserve these gains and forestall a recession, she submitted further, “domestic productivity must be accelerated immediately, particularly as a number of countries contemplate broad export restrictions. Thus, stimulating the manufacturing sector is mission critical to support local consumption needs and reduce output gap to stem price developments.”
She praised the implementation of various CBN interventions earlier introduced to mitigate adverse effects of these shocks, including disbursements of N10.15bn from the N100bn health sector intervention fund, and N93.2bn under the N1tr Real Sector Support Fund to boost local manufacturing. Also, over 14,331 beneficiaries, she stressed, have received N10.9bn out of the N50bn Targeted Credit Facility for households and SMEs, which in addition to prior monetary and fiscal reforms, “have kept the domestic economy resilient, blunting the effects of the coronavirus on economic activity as reflected in a higher than anticipated Q12020 real GDP growth of 1.87% (year-on-year).”