| Nigeria Economy |    2243 VIEWS  |
| Nigeria Economy | |
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Wednesday, September
09, 2020 / 12:21 PM / by CBN / Header Image Credit: NESG
The attention of the Central Bank of Nigeria (CBN),
has been drawn to a recent press release titled "Matters of Urgent Attention" by the Nigerian Economic Summit Group (NESG), which calls into question some of
the measures taken by the CBN to support the stability of our financial system
and enable faster recovery of our economy, following the negative impact of the
COVID-19 pandemic on Nigeria.
Related Link: NESG Issues
15-Point Statement on The State of Nigeria's Economy
As we all are aware, the impact of COVID-19 on
countries across the world resulted in a significant downturn in the global
economy. Consequently, countries including Nigeria were forced to impose
lockdown measures in order to contain the spread of the pandemic. This action
resulted in depressed economic activity in the first half of the year. Except
for China and Vietnam, advanced, emerging and frontier market economies, all
experienced significant negative growth in the first half of 2020, and some are
currently in a recession.
In response to these unfortunate events across the
globe, central banks have embarked on measures aimed at stabilizing their respective
economies by reducing lending rates, which declined to negative territory in
several advanced economies, in addition to increasing the scale of their asset
purchase programmes. Indeed, after reducing its Federal Funds rate to 0
percent, the US Federal Reserve Bank implemented a huge securities purchase
programme, which included purchase of corporate bonds (including those below
investment grades). The Reserve Bank also provided credit facilities to
non-bank institutions which included, money market funds and corporations. The
balance sheet of the US Federal Reserve in support of these activities
increased by over $3 trillion, while the European Central Bank expanded its
balance sheet by over $1 trillion. Furthermore, the Bank of England in an unusual
move gave an open check to the UK Government in order to fund its recovery
efforts.
It is therefore pertinent to state that the Nigerian
economy is not immune from these crises given the over 65 percent 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 resulted in an over 60 percent 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.
The Central Bank of Nigeria like other Central Banks
across the world had to embark on extraordinary measures in order to stabilize
the economy from an extraordinary shock. We took steps 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 taking the following actions;
i. A 1-year extension of a
moratorium on principal repayments for CBN intervention facilities;
ii. Strengthening of the Loan
to Deposit ratio policy, which has resulted in a significant rise in loans
provided by financial institutions to banking customers. Loans given to the
private sector, have risen by over 21 percent over the past year.
iii. Creation of NGN 50 billion
target credit facility for affected households and small and medium enterprises
through the NIRSAL Microfinance Bank;
iv. Creation of a NGN100
billion intervention fund in loans to pharmaceutical companies and healthcare
practitioners intending to expand and strengthen the capacity of our healthcare
institutions; v. Creation of a research fund, which is designed to support the
development of vaccines in Nigeria.
v. A N1 trillion facility in
loans to boost local manufacturing and production across critical sectors;
vi. Regulatory Forbearance was
granted to banks to restructure loans given to sectors that were severally
affected by the pandemic
vii. Mobilization of key
stakeholders in the Nigerian economy, which led to the provision of over N23bn
in relief materials to affected households, and the setup of 39 isolation
centers across the country.
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. Analysts
expected GDP growth to decline by 7.4 percent but the impact of the measures by
the monetary and fiscal authorities helped to reduce this decline to 6.1
percent. This decline was less severe than the decline experienced in other
economies such as the United States, South Africa, and India which saw significant
declines in growth by 32 percent, 52 percent and 23 percent respectively. We do
expect that with the phase out of the lockdown measures, GDP growth in the 3rd
quarter will be much better than that of the 2nd quarter, due to the impact of
the measures being implemented by the Monetary and Fiscal Authorities.
The CBN also feels compelled to let Nigerians know
that in spite of the cordial and open relations between both organizations, the
NESG could have raised its allegations directly with us but never did. Instead
they chose to release a Press Statement, having leaked its content to a leading
Business Newspaper in the country. Let us now turn to the specifics of their
diatribe.
On the CBN's development finance activities, we are
comforted by the NESG's reluctant admission that many Central Banks around the
world are also engaging in similar actions. The CBN engaged in development
finance in order 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. In pursuit of transparency,
the CBN usually publishes disbursements made under these activities in our
Economic Reports.
Although the bourgeoises atop the NESG may not feel
the impact of the Bank's development finance activities, many ordinary
Nigerians, including smallholder farmers, households, and medium-scale
entrepreneurs across the country know better. As encapsulated in our most
recent monthly economic report published on the Bank's website, a total of
N38.11 billion was disbursed as loans to 44,458 beneficiaries through the
NIRSAL Microfinance Bank (NMFB). This number has risen to N59.12 billion;
supporting to 103,189 beneficiaries as of August 2020.
It is important for the NESG to note that our
intervention programmes in the agricultural sector were a key contributor to
the resilience of the agricultural sector during the crisis, as the sector
experienced positive growth of 1.6 percent in the second quarter of the year
despite the lockdown. As the NESG may be aware, as a result of 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.
Furthermore, by alluding to the fact that money cannot
address constraints in the agriculture sector, the NESG failed to realize that
access to credit is listed among the three major challenges faced by farmers
and businesses in Nigeria. While the Federal Government is seeking to address
issues such as access to electricity and logistic constraints faced by
businesses, it was vital for the CBN to address an area that we had sufficient
ability to impact upon, given the nature of the crisis we faced, which is
improving the flow of credit to critical sectors of the economy.
Contrary to the NESG's allegation that our 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.
On the revisions to the BOFIA Act, there are many
reasons why we see a total ignorance or malicious intent on the part of the
NESG. First, the provision they refer to as being currently conceived as part
of the new BOFIA already exists as Section 53 in the old Act, which is now
Section 51 in the amended Act passed by the National Assembly. The current bill
has not proposed any changes to that section at all. Second, contrary to their
misleading anxiety and associated reportage, the provision of Section 51 does
not purport to confer immunity on the Governor of the Central Bank of Nigeria
like that which obtains for State Governors. Rather, this provision protects
the Federal Government, the Central Bank of Nigeria and their respective
officials against adverse claims for actions or omission in good faith exercise
of powers under BOFIA and other specified statutes including the Central Bank
of Nigeria Act and regulations made thereunder.
The import of the said provision is to set a threshold
against which suits against public officers must be filtered, such that for a
suit to be maintainable it must scale that threshold by proving bad faith on
the part of the pubic officer. It is not a bar against action.
Indeed, a review of the legislative history of BOFIA will readily show that the said provision also appeared as Section 49(1) of the then BOFIA of 1991. Further digging also readily show that the same law is employed in other legislations including the extant:
a.
Central Bank of Nigeria Act 2007 (Section 52),
b.
the NDIC Act 2006 (Section 55) and
c.
the Investments and Securities Act 2007(Section 302)
A similar provision is in the AMCON (Amendment) Act
2020, as it had been noticed that debtors and the like simply rush to court,
obtain injunctions and stop orderly resolution of cases and proper
implementation of the law.
The false alarm raised by the Nigerian Economic Summit
Group raises serious credibility questions on the actions of the group, as its
comments, which have been circulated across the globe, significantly harmed the
credibility of the Governor and the CBN as an institution.
On border closure, we are disappointed that the NESG
has not shown any tendency to deeply interrogate the real reasons for the
closure. While the CBN is not opposed to its reopening, we must never forget
the real reason why that border was shut in the first place: significant economic
sabotage involving smuggling of many fake products, drugs, small arms, and
other goods. How can a Nigerian farmer struggle for months to plant, cater, and
harvest their crops only to find that those crops cannot attract good prices
because of smuggled products from across our borders? Does the NESG know that
according to the International trade Center, Benin Republic imports as much as
rice as China and nearly as much frozen chicken as the U.K.? In which country
does the NESG think all these rice and chicken end up? How then can a Nigerian
rice farmer or poultry owner survive?
While the Federal Government is doing its best to
tackle these issues and reopen the border, we must bear in mind that border
issues require cooperation by other countries. But if these countries, given
their huge benefits from a rigged system, deny there is even a problem, how can
Nigeria reopen the border without resolving these matters?
With respect to foreign exchange, the CBN operates two
windows: wholesale and retail. In the wholesale window, banks are allocated
FOREX weekly, which is meant to be allocated to their customers at their
discretion, reflecting customer size and distributive efficiency, for final
sale to parents paying school fees, patients settling medical bills abroad, SME
traders importing small-scale inputs and raw materials, and general travelers
for business and personal trips. The CBN also allocates a certain amount of FX
to licensed BDCs per week, who resell to small-scale users. In both categories,
the CBN does not know the final buyers of this FX.
In the retail window, banks submit a detailed list of
applicants who are then allocated foreign exchange based on availability. Given
that these submissions are first scrutinized by the banks and are accompanied
by the provision of significant documentation, we do not understand the extra
transparency being called for by the NESG.
Based on very limited information and cross-country
exposure, the NESG refers to the CBN's recent directive, which simply sets a
floor on saving rates as "price fixing". Given that in an ideal economic
textbook/theory, saving should be equal to investment, we expected total
deposits should closely mirror total loans. Yet, over the past several months,
we have noticed an increasingly large gap between total deposits in the banking
system and total credit to the economy. While total deposits stood at about N25
trillion in January 2020, total loans stood at N17 trillion. As of August 2020,
while total deposits have increased to N29.7 trillion, total loans were only
N19 trillion.
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.
Although the NESG, under its current leadership, has
fallen short of its own standards and become a shadow of its old self, we
believe there are better ways to resuscitate the Group's brand other than
through cheap popularity and tarnished attention using ambushed press
statements made up of contrived allegations. Given that the NESG should know
better, we believe that these allegations are reflective of sinister motives
and malicious intent.
Related Post: NESG v CBN: Beyond the Battleground - The Need for Facts, Perspective and Resolution
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