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CBN Intervention: Playing to the Gallery or Serious Business?

Monetary Policy	1203 VIEWS
Monetary Policy
1203 VIEWS

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Thursday, April 16, 2020 / 01:50 PM / by CSL Research / Header Image Credit: News Express Nigeria

Earlier this week, the governor of the Central Bank of Nigeria (CBN) announced certain policies it plans to implement in the immediate, short and medium term to reposition the Nigerian economy as soon as possible while preventing a prolonged recession. Our searchlight beams on the manufacturing sector which directly contributed 9% to GDP in 2019. In the short term (0-3 months), the CBN intends to support loan restructuring for affected sectors which includes critical sub-sectors of the manufacturing sector and provide N1.0tn loans to boost local manufacturing.

Additionally, the apex bank aims to reinvigorate financial support for the sector by expanding intervention across its value chain, prioritising provision of FX for importation of machinery and critical raw materials aimed at supporting local manufacturing. In the medium term (0-3 years), the apex bank aims to create a N500bn initial intervention fund specifically targeted at manufacturing firms to procure state-of-the art machinery and automated manufacturing models that would fast track local production.

The outbreak of the coronavirus has significantly impacted manufacturing activities within the country. We think many of the sectors that have been hard hit and would still face struggles post Covid-19.This was evident in March manufacturing PMI which fell to 51.1 in March from 58.3 in February. We believe the full impact of the pandemic will be more pronounced this month. Some of the key concerns in the manufacturing sector include: raw material challenges, FX challenges, supply chain distruption, and weak demand. Vast majority of Nigerian manufacturers rely on several raw materials from China and Europe who have been badly hit by the global coronavirus pandemic. Thus, while importation of such essential items have not being banned, ability to get supplies have been significantly disrupted.

In addition, supply chain within the manufacturing space has been fairly disrupted. While the lockdowns have not impacted movement of manufacturing and supply trucks, key distributors in the value chain have opted to stay away from business due to increasing health risk associated with not doing so. This, has led to some breakdown in manufacturing firms' route to market. Meanwhile, we note several firms have seen demand plummet on the back of the enforced lockdowns and consumer behaviour which has seen households ration income to only essentials while avoiding luxury purchases.

In our view, huge amount of stimulus would be required to ease the pain of the manufacturing sector. Although, we consider the intended policies of the CBN laudable, our concerns remain around the Nigerian history of poor policy implementation. Without a successful stimulus implementation, the manufacturing sector may be facing its worst year since the oil price crash.