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Assessing CBN’S policies in containing impact of Coronavirus on economy

The Central Bank of Nigeria (CBN) and the banking community have been working assiduously to contain the impact of Covid-19 pandemic, which has continued to spread across the globe.

The outbreak of the Covid-19 has resulted in the weakening performance of global output growth since January 2020, reflected in losses in global stock values, declining primary commodity prices, disruptions to the global supply chain associated with large-scale global lockdown of mega metropolis and whole countries; and social distancing. Also, there have been adverse shocks to global capital flows; vulnerabilities and uncertainties in major financial markets; as well as rising corporate debt in the advanced economies and public debt in some Emerging Market and Developing Economies (EMDES).

Consequently, global output growth in 2020 is projected to fall significantly below the initially projected level of 3.3 per cent.

The International Monetary Fund (IMF) says the coronavirus crisis has caused a global recession.

Reports show that rich nations have spent over $9 trillion so far on tackling the economic fallout from Coronavirus. And more spending is on the way as governments try to ensure there is a functioning economy post the pandemic.

In Nigeria, the CBN Staff projections indicate that real GDP in the first quarter (Q1) and Q2 2020 will slow because of the tepid global demand, resulting from the recent outbreak of COVID-19, depressed global aggregate demand and supply, and the oil price war which has resulted in supply glut and decline in crude oil prices.

This muted outlook for the first half of the year may thus dampen overall growth prospects for 2020.

Tackling the negative effects of COVID’19 on the economy will require unconventional monetary policy, said Uche Uwaleke, professor of finance and capital markets at the Nasarawa State University Keffi.

The apex bank has already risen to the challenge through the stimulus packages it rolled out recently. The Nigerian banking sector regulator took decisive action to safeguard the Nigerian financial system and the economy from the emerging headwinds.

One of the key policies is the provision of extended moratorium on loans by an additional one year beginning from March 2020. This is to ease pressure on loan repayments. The bank also reduced interest rates from nine to five per cent on its existing intervention programmes over the next one year. It created a N50 billion fund to support households and Small and Medium Enterprises (SMES) affected by COVID-19; introduced credit support for the healthcare sector; introduced regulatory forbearance to consider temporary and time-limited restructuring of loan terms and tenors to households and businesses affected by COVID-19, and strengthened the loan-to-deposit ratio (LDR) policy. The bank also announced an intervention fund of N1.1 trillion to cushion the adverse effects of the Coronavirus outbreak on the economy.

The sum of N1 trillion from this amount will be used to support local manufacturing to boost import substitution, while the balance of N100 billion will be used to support the health services sector and products through the provision of loans to the pharmaceutical companies, hospitals and other health practitioners to build new hospitals and health facilities or expand existing ones to first class health centres. This is in addition to the N1.5 trillion private sector driven Infraco Project fund, designed to target the construction of critical infrastructure across the country. In addition, pharmaceutical companies would be assisted through loan interventions to re-establish drug manufacturing firms in Nigeria and curtail the spread of the corona virus.

“It is expected that through these interventions, about N3.5 trillion would be injected as stimulus to support the Nigerian economy during this trying time,” Godwin Emefiele, governor of the CBN, said.

Analysts in the financial services sector have seen these interventions as welcome development.

Ayodele Akinwunmi, relationship manager, corporate banking, FSDH Merchant Bank Limited, said the efforts of the CBN and banks to support the economy through granting credits at concessionary terms are very commendable.

However, he said monetary policies have their own limitations and cannot completely protect the economy against the impacts of the Covid-19.

“We need strong and bold fiscal and trade policies to mitigate the adverse impacts of the Covid-19 and to build a resilient economy, even long after the Covid-19 issue is over,” Akinwunmi said.

Following the drop in oil price to as low as $23 per barrel occasioned by the outbreak of coronavirus and the declining external reserves to about $36 billion, the foreign exchange pressure resumed leading to the dollar trading at N420 at black market.

Consequently, the regulator moved the FX sales rate to Foreign Portfolio Investors (FPIS) to N380.2/$, from N366.7/$, in a move that suggests a technical devaluation of the naira.

On March 21, the CBN adjusted the official exchange rate to N360 per dollar from N307/$. Emefiele said the exchange rate of N380 per dollar at the Investors and Exporters (I&E) forex window was not devaluation but an adjustment.

Uwaleke said, “I think that in view of the drop in forex demand occasioned by the fall out of the COVID 19, the CBN could have delayed this action especially coming few days after the CBN Governor had assured the nation that no devaluation was in the offing. While the upward ‘adjustment’ in exchange rate may increase foreign portfolio investment in the near term and temporary halt capital flight, it rubbishes the 2020 federal and state budgets predicated on N305 to the dollar.”

He said this was especially against the backdrop of the fact that the capital provision in the budget had huge dollar component.

He said it also presented a major headwind to the country’s capacity to service public debt given the growing proportion of foreign debt, exacerbating in the process the fiscal imbalance.

“Furthermore, as an import-dependent economy, a major risk will be to inflation. In the months ahead, the Manufacturing and Non-manufacturing Purchasing Managers Index may contract due to high cost of inputs with adverse effect on the already high unemployment rate. This will be compounded by the impending deregulation of the downstream sector with NNPC ceasing to be the sole importer, as oil marketers are compelled to access forex at market-determined exchange rates.”

He explained that even at the current price of N380 to the dollar at the autonomous Forex market, not a few think the naira was overvalued.

“By implication, the exchange rate is likely to rise further. The result is that speculators take over the market, politicians in particular see incentive to hold dollar as a store of value and if our experience is anything to go by, even when oil price recovers, the exchange rate will remain sticky downward.”

He pointed out that the action by the CBN had a signalling content that should not be underestimated. With external reserves of nearly $36 billion enough to finance many months of imports well in excess of the 3 months international threshold, the CBN ought to have continued to defend the value of the naira while it fine-tunes demand management strategies to further contain the pressure, he said.

“If Nigeria has witnessed some level of macroeconomic stability postrecession, consistent with the objective of the ERGP, it is primarily due to the effort of the CBN in ensuing exchange rate stability. This latest upset in the forex market could reverse gains already made,” he further said.

Before the outbreak of coronavirus, the CBN had introduced some policies targeted at growing and stabilising the economy. Such include the Loan to Deposit Ratio (LDR), Open Market Operation (OMO) among others.

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