Coronanomics (25) - A Regulator's Burden - CBN's Tale of Heterodoxy

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Wednesday, July 01, 2020 05:30 AM / by Proshare Content/ Header Image Credit:  EcoGraphics


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Against the background of Central Banks across the globe cutting interest rates and buying back domestic treasuries (T-bills and bonds), Nigeria's Central Bank recently announced a six-step policy initiative to head off a recessionary dip as the Coronavirus pandemic takes a toll on global economies and threatens to lead them into a recessionary spiral.   


Illustration 24: Policy Conundrums

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The CBN's six policy Steps include the following (see Table 17):

  • Temporary and time-limited restructuring of the tenor and loan terms for businesses and households. This should create stability of the lending sector as disruptions to business would make repayments difficult, thereby increasing the non-performing loans (NPLs) of the sector which had gradually started sliding towards the CBN required rate per bank of 5% or less.
  • Cutting down of interest rates on intervention programmes from 9% to 5%. The rate cut on intervention fund would cushion the adverse consequence of business disruption that would likely result from production closures, supply chain disruptions and demand collapse as social distancing and restricted movement lead to lower domestic consumer and producer spending.
  • A N50bn targeted credit facility would be expected to assist in creating liquidity in the domestic credit market. The support of the credit market with an additional N50bn may prove inadequate to repel a recession as it would not address the tricky problems of supply chain disruptions, rising domestic inflation rate (reduced real consumer spending power) and the rising risk of lending into a reclining domestic economy.
  • Regulatory forbearance would mean that the CBN would ease enforcement of strict rules around advancing credit. The relaxed enforcement regime would allow the banks give customers breathing space to repay loans without suffering heavy charges against their profit and loss accounts by way of impairments. In other words, the CBN would hope to keep the financial system, particularly the credit market, stable. The move is commendable but may not achieve much as the problem would remain the lack of production throughputs to create sellable goods which in turn would generate revenues, profits and free cash flows.
  • Strengthening the loan to deposit ratio (LDR) of banks is obscure. The CBN raised LDR twice in 2019 and banks are still struggling to meet the recent 65% ratio. Pushing banks to lend further in a recessionary environment could adversely impact the industry's falling non-performing loans (NPLs).
  • Support for the health care industry is a brilliant initiative, except for the fact that if health care companies cannot import critical inputs to manufacture drugs, no matter how low interest rates fall or how much credit they can get, the financial situation of pharmaceutical companies may not improve significantly. To get Pharma running supply chains need to be restored and effective demand of consumers augmented.

 

Table 21: The Good, The Bad and The Neutral

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In addition to its six-step policies, the CBN announced an N1.1trn intervention fund to support critical sectors of the economy. The CBN governor in a recent statement noted that about N1trn would be used to support the local manufacturing sector as well as intensify import substitution.  The remaining N100bn would be used to support the health sector to ensure laboratories, researchers and innovators work with scientists around the world to patent and produce vaccines and test kits in Nigeria.

 

Classical Macroeconomic Approach to COVID-19

 

Illustration 25: Expansionary Fiscal Policy and Contractionary Monetary Policy

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Illustration 26: Expansionary Fiscal Policy and Expansionary Monetary Policy


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Illustration 27: Expansionary Monetary Policy

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Related Reports (PDF)

1.     Download the Full PDF Report - Coronanomics and the Nigerian Economy, June 06, 2020

2.     Executive Summary PDF - Proshare, June 06, 2020

 

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