NPL Growth, Budget Delay, Electoral Spending, Inflation Worry MPC Members

Members of the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) want the fiscal and monetary authorities to fix hinderances to attainment of the nation’s full economic potentials.
In their personal statement leading to the unanimous decision to hold rates for the umpteenth time, released by the CBN at the weekend, the nine committee members identified the red flags as the bloating Non-Performing Loans (NPL) at 16.21% as at February, compared to the 5% regulatory threshold. This, they blame for fragility among Nigerian banks, just as the continued delay in passage of the 2018 Appropriation Bill by the National Assembly and expected spending ahead of the 2019 general elections.
Specifically, the two-day meeting chaired by CBN Governor, Godwin Emefiele, ended on April 4, 2018, with members voting to leave the Monetary Policy Rate (MPR) at 14%; Cash Reserve Ratio (CRR), 22.5%; 30% Liquidity Ratio; and Asymmetric corridor at +200 and -500 basis points around the MPR.
To reach these decisions, members noted the\at inflation rate is still far from desired, even as the expected huge electoral spending. They also agreed that the delayed budget passage could result in substantial injections of funds in the second half of this year as government attempts to meet planned commitments.
For example, Edward Lamtek Adamu, a deputy governor of the CBN and committee member, argued that the “the immediate effect of this, combined with the repayment of local debt by the government and election spending would be a surge in banking system liquidity. Monetary policy cannot, at the same time, be expansionary. At 14.33% in February 2018, inflation is still significantly higher than the Monetary Policy Committee’s preferred range of 6 – 9%,” he added.
For him also, the growth in NPL ratio continues to be in excess of the CBN’s desired level.
Agreeing with Adamu, Adebayo Adelabu, his fellow Deputy Governor, agreed that NPL growth among banks is assuming worrisome dimension in the aftermath of the 2015 slump in crude oil price, at a tie most of the banks are heavily exposed to the upstream segment of the sector.
“The situation was complicated by the recession, which pushed many businesses particularly small and medium scale enterprises out of viable zone. Although most of the soundness indicators are still within the prudential requirement, it is a matter of utmost concern that these indicators are almost at the threshold of the requirement.
“This, invariably, has implication on the capacity of the banks to support the fledgling recovery. For example, credit to the private sector has been exceptionally weak over the last three years on account of constraints imposed by rising NPLs, among other factors,” he stressed
Another source of concern, argued Prof. Adeola Adenikinju, a member of the MPC, is the “continued depletion of the excess crude account, the monetization and sharing of oil revenues, and foreign debts without any effective stabilization fund… Added to this is the potential spike in domestic spending that is a regular feature of past electoral cycles in Nigeria.
“All of these factors, plus the rising debt profiles of the government, increases inflationary outlook for the economy,” which he called for the synchronisation of fiscal and monetary policies in Nigeria.
For a low-inflation induced economic growth, Adenikinju urged the Federal Government to be more committed to sustaining “an effective, functional and well-resourced stabilization account that will provide needed buffer for the economy, increase in non-oil tax-GDP ratio, horizontal and vertical diversification of the oil sector, speedy passage of the 2018 budget, payment of contractors’ debts to reduce the NPLs of banks, provision of more credit to the economy by the banking sector, reduction in the maximum lending rates by banks and the maintenance of adequate foreign reserves as a hedge against reversal in portfolio investments and cyclicality of the global oil market.”
In his own submission, Dr. Robert Asogwa, a member of the committee noted the NPL growth, just as the rise in average daily request by banks from the Standing Lending Facility (SLF) window. Added to this, he stressed, is the continued reliance of many banks “on operations in the government debt market to remain solvent are all early warning signs of future threats in the banking industry.
“While the gradual recovery from economic recession may rectify some of the causes of the increases in non-performing loans, the current preference of banks for SLF,” he added, sends public signals of interbank fear and caution, but also introduces constant volatility in the interbank rates, and when unchecked may unnecessarily be expanding the balance sheet of the Central Bank.”
For Asogwa, “Increasing arbitrarily the rates on the SLF as a strategy to discourage banks from utilizing the window may also not be a good policy as this would unjustifiably expand the margin between the rates on SLF and that of the SDF. A significant reduction of MPR at this time could even further weaken the solvency position of these deposit money banks.
Also hammering on the bloating NPL rate, Mrs. Aishah Ahmad, a Deputy Governor, expressed worry at the loan concentration in a few sectors by Nigerian banks, despite their relatively strong balance sheets and the stable outlook.
“Whilst macro prudential measures being implemented by the CBN are helping to proactively manage this risk, a stronger and resilient economic recovery remains crucial to reversing this trend,” she stressed while agreeing that the country’s continued exposure to volatilities in crude oil prices and the need to build fiscal buffers and sustain recovery efforts, as well as revenue, economic and export diversification in view of volatilities in crude oil prices.
This, he continued, “underscores the importance of ongoing efforts of the fiscal authorities towards economic and revenue diversification, such as the recent inauguration of the National Food Security Council and the implementation of Voluntary Asset and Income Declaration Scheme(VAIDS).”
The anticipated “huge fiscal spending for the proposed 2018 budget and
preparations ahead of the 2019 elections may also have inflationary effects,” she stressed, and calls for proactive and cautious monetary policy response to ensure there is no upward inflationary pressure.
“Thus, I would encourage quick passage of the 2018 Appropriation Bill by the National Assembly, to keep fiscal policy on track, boost investment, employment and economic output for the benefit of the citizenry.”
Dahiru Bulama, a member, is not impressed with the 0.83% current economic growth rate at 0.83%, given Nigeria’s 2.72% population growth rate and the recovery expected through implementation of the government’s Economic Recovery and Growth Plan (ERGP) and the Medium-Term Expenditure Framework (MTEF).
Besides these, he lamented the deterioration of national infrastructures like “roads, poor electricity supply and distribution and the non-existence of stabilization programme in place to assist sustainability of growth.”
He challenged government to build a stabilization programme by “increasing oil output, food security programme and see how investment can be channelled to employment enhancing sectors of the economy such as the agricultural sector, manufacturing, and other sectors of the economy.”
He also urged government to help reduce NPLs among banks by redeeming contractor debts, while monitoring commercial banks closely against vulnerability and guided appropriately in their operations, drawing attention also to the increased utilization of the SLF by some banks.
CBN Governor, Godwin Emefiele, on his part voted for retention of the rates, considering the country’s high unemployment rate, just as he warned that the current recovery rate is still structurally delicate.