Sustaining financial system’s growth momentum in 2018

CBN governor

Nigeria is just emerging from a recession, but dubbed “fragile recovery.” So far, there are promises on increased revenue, value added export promotion, fair deals for small businesses, reduced debt service bill and real sector-friendly investments in 2018. Are these “as usual”? CHIJIOKE NELSON writes.

By August 2016, when the official announcement of the economy’s slip into recession was made, it was more of a “talk show.” Granted, people were already experiencing difficult times, but regarded the times as the “usual” hardship. By December 2016 through June 2017, the real struggle as “never before” had become the lot of all. Yes, the real recession had taken toll on all economic activities.

At the government circle, even those who were eager to embezzle funds could not find much in the treasury because the income stream was almost countable by the fingers. State governments were deep in debts, not just for repayments of borrowed funds, but the necessary obligations due workers, even as much as salary. Nonetheless, some among the chronic debtors were also living in flamboyancy and others investing in frivolities and non-economic projects.

The banking sector was at the height of uncertainties, with high dose of non-performing loans; riddled with challenges of meeting the foreign obligations; reeling in pains from a stripped status of public sector banking; and sudden rush for competitive retail banking proposition as an alternative to public sector banking.

Of course, as a survival strategy, banks redoubled their instinct for multiple charges against customers in the face of dwindling opportunities and income, which subsists till now. It is as real as charging for opening an account in the name of “Account Maintenance Fee”, with associated Value Added Tax. There is also Card Maintenance Fee and VAT, among others.

A renowned economist, Adedoyin Salami, who cited a Banking System Stability Review in his monetary policy notes, affirmed that the banking sector was struggling to cope with the consequences of a fragile economy.

Noting that the key risk factors to watch include credit default risk, obligor and sector concentration risk and liquidity risk, he canvassed urgent need for policy makers to define a series of pathways to lower inflation; interest rates; banking system stability; and rapid, inclusive and sustainable growth.

By the same time under consideration, from real sector operators to individual consumers, there was massive scamper for dollar, as the nation’s major earner- crude oil, remained subdued by international vagaries. At the height, a dollar was exchanged for N520 by February 2017. Inflation, exchange and interest rates and the associated general consumption were at various disheartening levels.

While policy makers never rested on their oars, each option in the search for a return to stability appeared to be aggravating the other. For example, lowering interest rate for growth would naturally heighten inflation that were already around 17-18 per cent, while yielding to devaluation calls in efforts to attract foreign exchange may have ended up imperiling the economy all the more.

With continuous forex management, increased development financing intervention to facilitate the import substitution strategy and relatively stable oil price, the country defied all negative permutations and scaled through the recession by the second quarter of 2017.

The capital control policy, which excluded 41 items from accessing foreign exchange (forex) at the official window, has so far saved the country N217 billion ($600 million) worth of forex in its first full year of implementation. Besides, due to the dogged implementation of the restrictions, the country has also recorded spectacular improvements in domestic production of most of the excluded items as at now.

Of course, the economy is out of recession but perhaps, more in the paper and figures. The real effect of the long period of “inactivity” in the economy is yet to dissipate. For a reality check, the number of the poor has increased and this can be readily seen from the data by the Nigerian Bureau of Statistics that millions of Nigerians lost jobs in the period; other millions are not gainfully employed; and another millions are not employed at all.

A Monetary Policy Committee member, Dahiru Hassan Balami, had noted that unemployment is an important area that requires sound policies of both the monetary and fiscal authorities, to reduce the number and spur the much-needed growth in the economy.

The real sector operators and individuals seem to be savouring gains in accessing foreign exchange now for their import of raw materials, travel allowances from banks and tuition for their children overseas. Government is gradually gaining some grounds in lost income with rebounding oil prices and prospects of successful implementation of Voluntary Assets and Income Declaration Scheme (VAIDS). So continuity in 2018 is important.

The retired Deputy Governor of the Central Bank of Nigeria (CBN), Alhaji Suleiman Barau, had pointed out that lack of significant turnaround in power and energy would continue to feed into banks’ pricing model and mode of operations.

He said the banking sector has been challenged by a number of factors like the prudential regulations, the benchmark interest rate at 14 per cent, which is still below the current inflation rate by two per cent, while Non-Performing Loans (NPLs) are on the rise.

“It would be extremely hard for Small and Medium Scale Enterprises to operate profitably under such a regime when their internal rate of return could barely exceed 20 per cent. This development would continue to pose considerable risk to private investment in the medium term,” he said in his post-Monetary Policy Committee note assessed by The Guardian.

A renowned economist, Adedoyin Salami, who cited the Banking System Stability Review, noted that the banking sector is struggling to cope with the consequences of a fragile economy.

Noting that the key risk factors to watch include credit default risk, obligor and sector concentration risk and liquidity risk, he canvassed urgent need for policy makers to define a series of pathways to lower inflation; interest rates; banking system stability; and rapid, inclusive and sustainable growth.

Sustaining Momentum in 2018
Nonetheless, 2018 may pose less friction for the small business segment, which are generally known to be the hub of economic growth, if promises by the banking sector are delivered and expectations from the fiscal authority crystallise.

The Deputy Governor, Financial System Stability, Dr. Okwu Nnanna, in his assessment of the economy, said that although downside risks to the growth outlook has continued in the economic structure and uncertainty in the recovery of crude oil prices, the improving economic indices is worth the optimism.

In his MPC note, the economist said work must be sustained to create the fiscal space to implement the Economic Recovery and Growth Plan (ERGP).

“I remain positive that that the recently launched tax amnesty programme under the Voluntary Asset and Income Declaration Scheme (VAIDS) would scale-up revenue and build buffers to cushion the impact of oil prices on fiscal operations,” he said.

The nation’s debt-service-to-revenue ratio recently recorded a new decline from about 66 per cent to 45 per cent, courtesy of the improving revenue mobilisation from both domestic and foreign sources.

The decline, which will now see to the deployment of more funds to the areas of development needs, instead of payments of debts, is still being worked on for more reductions, the Minister of Finance, Mrs. Kemi Adeosun, assured.

Just recently, the Federal Government floated a $3b dual bond in its pursuit of 2017 budget implementations, as well as the much-talked about refinancing of domestic deals that has kept up the country’s debt service bill at record high.

The dual bond, under a  Global Medium Term Note programme, is made up of $1.5 billion 10-year deal at a rate of 6.5 per cent and another $1.5 billion for 30-year period at a rate of 7.625 per cent, all repayable with a bullet payment of the principal on maturity.

“Nigeria is implementing an ambitious economic reform agenda designed to deliver long-term sustainable growth and reduce reliance on oil and gas revenues while reducing waste and improving the efficiency of government expenditure.

“Successfully extending out debt profile in the international market to 30 years is a key element of that strategy as it establishes a basis for the longer term financing required for transformational infrastructure investment,” she said.

The Director-General of Debt Management Office, Ms. Patience Oniha, said: “This time, Nigeria issued a new 10-year bond at a yield of 6.5% and a 30-year benchmark, priced at a yield of 7.625%, which despite the longer tenure, remains cheaper than our 15-year issuance earlier this year.

“Perhaps even more important is that with this dual tranche issuance, the objective of reducing the cost of government borrowing has been achieved.”

The nation’s Deposit Money Banks ended the 2017 Bankers Committee retreat with a resolve to grow their five per cent equity contribution pool to the agriculture enterprise initiatives to more than N56 billion in 2018.

But in another radical resolution, the bankers agreed to cut its earlier nine per cent interest rate plan for the borrowers of the fund to five per cent, as well as incorporated road side businesses into the beneficiary list.

The Governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, who spoke for the Committee, in Lagos, said about 50 per cent of the fund is now reserved for some who want to go into barbing and hair dressing business and other small businesses, including those who want to acquire rice harvesting machine and implements for agriculture.

Barring all unintended circumstances, the disbursement of this fund is expected to have taken off since January 1, 2018.

“We feel these are the weak and vulnerable people that need assistance that may not even have the opportunity of walking into the bank and that will need to open a channel through which they can bank and access facilities from the bank.

Noting that the apathy among banks in giving the facility before now is because they are looking at risk-sharing issues, he said they do not want to carry the whole of the 100 per cent of the risk involved.

The apex bank said the new drive to disburse the funds to those in need would be facilitated by incentives to banks in the form of forbearance, like differential Cash Reserve Ratio for lenders that will go extra mile.

It will also include addressing the issue of risks embedded in lending to small businesses, like getting the Development Finance Institutions in some risk sharing agreement with banks, just to assure them that in case risks crystalises, it would not be entirely borne by them.

For CBN, despite criticisms over its persistent development interventions, 2018 will witness the revival of a N500 billion Export Stimulation Facility and N50 billion Direct Intervention Fund, which have been under consideration for two years.

The move, which is a fallout of series of engagements with the exporters and banks with CBN, would be looking at boosting exports of value added products in the non oil sector- cocoa, cashew nuts, palm produce, sesame seeds, solid minerals and rubber.

But Emefiele said that the new drive would be focused on “Produce, Add Value and Export” (PAVE), which would ensure that the products are improved before export, not just raw materials, to earn more value and create additional job. “In this meeting today, we met with the exporters and the banks. The purpose is to see to what we can do as CBN to support the activities of exporters in the country so that through this means we can see more of exports revenues from the non-oil sector to support the economy.

“We have decided to bring back to the table the N500 billion Export Stimulation Facility that we had proposed two years ago, as well as the N50 billion Direct Intervention Fund from the Nigeria Export-Import Bank. We have an improved NEXIM with new management there now and they have a very excellent track record of understanding of the private sector and the credit processes.

“We have also decided that we are going to have not just NEXIM, but CBN’s Development Finance Department, as well as the Governors Department’s Special Adviser on Agriculture to put a framework in place as to how the funds will be disbursed. But the most important thing is that we made it clear to exporters that it is an opportunity for us to create jobs and earn more export revenues, but whatever they do will be heavily monitored. Again, that the benefits expected if the intervention must be realised,” he added.

These are few of the promises that have now turned expectations for 2018. Sustaining the rebounding economy and growth will depend on the faithful implementations of the projections. Will we see them as promised? Time will tell.



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