Endorsement of the CBN's Development Finance


Tuesday, November 10, 2020 / 11:13 AM / by FBNQuest Research / Header Image Credit: Economic Confidential


The monetary policy committee (MPC) voted by six votes to four in September to cut its policy rate by 100bps to 11.50%. Three members voted to hold and a fourth to trim the rate by 50bps. From the personal statements that the CBN last week released, we can summarize the argument for an unchanged stance as a response to persistently rising inflation, welcome increases in monetary aggregates and improved credit flows to the economy (including from the CBN's own development finance initiatives). The majority stress the primacy of the CBN's remit to achieve and maintain price stability. 


Between May 2019 and August 2020 total credit to the economy increased by N3.8trn from N15.5trn to N19.3trn. (The data appear to cover lending by the deposit money banks.) We learn that the sectors to have benefited the most are manufacturing (N760bn), consumer credit (N530bn), and oil and gas (N480bn). We caution that the impressive growth in loan books seemingly faltered in September (Good Morning Nigeria, 06 November 2020). 


One member observes that over the same period the share of banks' total assets held in government securities declined from 23% to 10%. 


The healthy rise in banks' lending was their response to adjustments to the minimum loans-to-deposit ratio made by their regulator (the CBN). The MPC is unanimous in its views that the CBN's development finance role has softened the blow of the virus and that more of the same is desirable. A recent example is the N200bn mortgage facility for low-income earners. 


On the fiscal side we learn that the FGN's retained revenue amounted to N1.86trn in H1 2020 (47.6% of budget) and its expenditure to N4.45trn (88.8%). The underperformance on spending was on capital items, and the N2.59trn deficit was covered by FGN bond sales to the tune of N1.42trn 


In January-August the ratio for total debt service/total revenue reached 84.1%, compared with 51.5% in the year-earlier period. We suspect that the deterioration reflected the difficulty in collecting revenue under Covid-19 conditions more than any steep rise in debt servicing costs. 


There is little coverage of fx in the statements beyond praise for the CBN for the attainment of stability in the market. One member notes steps taken by the CBN to address inadequate demand and supply although we have to say that they will not be transformative: cooperation with the Nigerian Export-Import Bank to boost non-oil exports, new procedures to combat over-invoicing and the development of a system to verify import product prices. 


CBN staff forecasts have growth contracting by -3.9% y/y and -3.5% respectively in Q3 and Q4 2020, and then recovering by no more than 0.7% in Q1. Our own projections are negative growth of -4.7% y/y, -2.8% and -0.9% for the three quarters before a return to positive ground in Q2 2021. 

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