We Took Extraordinary Steps To Stabilize Economy, CBN Replies NESG

Explains Reduction In Deposit Rate

The Central Bank of Nigeria (CBN), on Tuesday said it has done all that it could possibly do to help mitigate the impact of the coronavirus pandemic since March, on the economy, as shown by the 6.1% 2020Q2 GDP contraction, an improvement over the 7.4% dropped initially anticipated.

This, the apex bank said in a rejoinder to a statement “Matters of Urgent Attention” earlier that day by the Nigerian Economic Summit Group (NESG), what the result of actions it took just like other central banks across the globe, was to “stabilize the economy from an extraordinary shock.”

In the case of Nigeria, the better than anticipated economic contraction, the CBN argued, was despite “the over 65% drop in commodity prices; disruptions in global supply chains and the unprecedented outflow of over $100bn of debt and equity funds from emerging markets between March and May 2020; in addition to the impact of the lockdown on economic activities.”

These activities, it continued, “resulted in an over 60% reduction in revenues due to the Federation Account, a significant drop in foreign currency inflows, which led to downward adjustments in the naira/dollar exchange rate and a rise in inflation due to the exchange rate pass through effect of imported inflation.”

This decline, it said, was less severe than of other economies like the United States, South Africa, and India at 32%, 52% and 23% respectively, expressed hope that the phase out of the lockdown measures would result in far better GDP growth in the 3rd quarter, “due to the impact of the measures being implemented by the Monetary and Fiscal Authorities.”

The statement by Isaac Okorafor, Director, Corporate Communication of the CBN, said the extraordinary steps were taken “to increase the flow of credit to critical sectors of the economy, in order to enable faster recovery of the economy.

“We also sought to prevent the economic crisis from spilling into a major financial crisis,” by offering a one-year extension of a moratorium on principal repayments for its intervention facilities; and strengthening the Loan to Deposit ratio policy, which significantly boosting the loan books of financial institutions to banking customers.

This, Okorafor said, increased loans to the private sector by over 21% over the past year; just as the creation of N50bn target credit facility for affected households and small and medium enterprises through the NIRSAL Microfinance Bank; and creation of a N100bn intervention fund in loans to pharmaceutical companies and healthcare practitioners planning to expand and strengthen the capacity of Nigeria’s healthcare institutions, among others.

“The effect of these measures which included provision of palliatives to individuals affected by the pandemic, increase in access to credit to critical sectors of the economy that are either high employers of labor or have the ability to create jobs at a fast pace, helped to contain a significant decline in GDP growth in the 2nd quarter of the year.

On why it engaged in development finance, the statement said it was “to address the credit needs of the sectors critical to improving livelihoods, reducing poverty, and promoting inclusive growth.

“These goals have become doubly important in light of the significant shocks to the economy following the ongoing COVID-19 pandemic,” and that for transparency, it usually publishes disbursements under these activities in its Economic Reports.

As contained in its most recent monthly economic report published on its website, the CBN recalled that “a total of N38.11bn was disbursed as loans to 44,458 beneficiaries through the NIRSAL Microfinance Bank (NMFB).”

This number, it continued, rose to N59.12bn; supporting to 103,189 beneficiaries as of August 2020.

The statement drew the attention of the NESG to the fact that due to the COVID-19 pandemic, “Vietnam, Cambodia, India, and Thailand placed export restrictions on the exports of critical food items, including rice and eggs. With these disruptions, the Nigerian economy could have faced a major food crisis, but for the government’s intervention programmes in the agriculture sector.”

On the allegation that the CBN’s “lending process is devoid of a proper framework, it is important to note that recipients of intervention funds from CBN go through an expansive due diligence process through participating financial institutions (PFI), following which an additional assessment process is embarked upon by the CBN before disbursements are provided.

“The PFIs expend extensive due diligence on these intervention loans as the risk of default lies with them.

Reduction Of Deposit Rate

The CBN statement also explained reasons behind the recent crash in Naira deposit rate, which it blamed on the noticeable mismatch and increasing gap between total deposits and total banking sector credit to the economy over the past several months.

“While total deposits stood at about N25tr in January 2020, total loans stood at N17tr. As of August 2020, while total deposits have increased to N29.7tr, total loans were only N19tr.

“Many rich cooperates have simply been content with saving their cash balances and collecting huge interest payments, rather than expanding their investment, which should lead to hiring more people and producing more goods. In other to forestall a continuation of this trend, the CBN had to act to discourage these practices for the good of the economy.

“In other words, the rationale for moving to reduce the saving rates by banks is actually to encourage more lending. We also need to note in light of COVID-19 and to encourage more investments; many Central Banks have cut their saving rates to nearly zero.

“In fact, some Central Banks, including the European Central Bank, the Bank of Japan, Denmark’s Central Bank and the Swiss National Bank, are now operating “negative interest rates”, which means customers pay banks to keep their deposits,” Okorafor added.

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