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Negative growth would have been worse if not for CBN intervention, say analysts

The anticipated negative growth in economy exacerbated by the Covid-19 pandemic among other economic headwinds has been lowered by Nigeria’s Central Bank’s policies and interventions.

The Monetary Policy Committee (MPC) after its two-day meeting last week in Abuja made a surprise cut to the Monetary Policy Rate (MPR), the second cut in less than six months and lowest since 2016.

The decision of the MPC further buttresses the Central Bank of Nigeria (CBN)’S determination to keep interest rates low to boost lending to the real sector.

According to Ayodeji Ebo, an investment professional based in Lagos, the reference interest rate has proven to be ineffective which has made the CBN apply the use of unorthodox and direct policies like the Loan to Deposit ratio, intervention loans, and the segmentation of the Treasury Bills market to boost lending.

Notably, this has led to a significant credit growth of N3.7 trillion or 24 percent from N15.6 trillion in May 2019 to N19.3 trillion as at the end of August 2020. The CBN adopted a dovish stance to create more legroom for the economy to recover from negative knock-ons from the pandemic and lockdowns.

The outbreak of Covid-19 has had significant adverse consequences for both the global and the Nigerian economies.

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It has led to unprecedented disruptions in global supply chains, sharp reduction in crude oil prices, turmoil in global stock and financial markets, massive cancellations in sporting, entertainment and business events, lockdown of large swaths of movements of persons in many countries, and intercontinental travel restrictions across critical air routes including but not limited to oil and gas, airlines, manufacturing, trade and consumer markets.

The country has recorded continued weakness in economic activities as indicated by the Manufacturing and non-manufacturing Purchasing Manager’s Indices (PMIS), which remained below the 50-index point benchmark.

Nigeria’s real Gross Domestic Product (GDP) contracted by 6.10 per cent in the second quarter of 2020 compared with expansions of 1.87 and 2.12 per cent in the preceding quarter of 2020 and the corresponding period of 2019, respectively.

The development ended, the three-year trend of low, but positive real GDP growth recorded in Nigeria since the end of the 2016/17 recession. The contraction in Q2 2020 was largely driven by the poor performance of both the oil and non-oil sectors due to the lockdown to contain the spread of the pandemic in Q1 2020.

However, there has been huge injection of monetary and fiscal stimulus into the global economy to contend the impact of the Covid-19 pandemic.

In furtherance of its financial stability mandate, Nigeria’s Central Bank has been providing support for the affected households, businesses, regulated financial institutions and stakeholders in order to cushion the adverse economic impact of the pandemic.

The intervention of the CBN has been a major boost to the economy despite the minuscule size of the intervention funds relative to GDP, said Ayodeji.

“The intervention funds has supported growth in some of the critical sector and the negative growth would have been worse if not for the CBN intervention. Some of the quoted companies have access these funds at single digit rate which has bolstered their profitability,” Ebo told Businessday.

The financial system has remained resilient though with regulatory support. The Nigeria’s Central Bank’s staff reports presented at the July Monetary Policy Committee (MPC) showed marked increase in the number of loans restructured; as at July 20, 2020, 22 banks submitted requests to restructure 35,639 loans of businesses impacted by the pandemic, representing 41.92 per cent of the total industry loan portfolio.

Aishah Ahmad, deputy governor, financial systems stability directorate, noted that this has partly reflected in improved industry risk profile, as NonPerforming Loans ratio declined from 6.6 per cent in April 2020 to 6.4 per cent in June 2020. Net interest margin remains robust despite lower interest income, perhaps due to much lower industry interest expense, as market deposit rates continue to decline.

The various interventions by the CBN are aimed at to reflate the economy, improve aggregate supply and drive down inflation. Recent interventions were largely in the areas of Manufacturing, agriculture, electricity and gas, solar power and housing constructions among others. MPC members expressed optimism that these initiatives will significantly ease the adverse impact of the COVID-19 pandemic and set the economy on a path of recovery.

Part of the CBN’S intervention funds include the N50 billion household and Small and Medium Enterprises (SME) facility, N100 billion healthcare and N1.0 trillion manufacturing and agricultural interventions alongside significant interventions in other growth enhancing sectors, with remarkable implementation success.

The CBN is also leading a N15 trillion Infrastructure Company (Infraco) Project for building critical infrastructure.

The Apex bank recently introduced the Solar Connection Intervention Facility to complement the Federal government’s effort of providing affordable electricity to rural dwellers through the provision of long term low interest credit facilities to the Nigeria Electrification Project (NEP) pre-qualified home solar value chain players that include manufacturers and assemblers of solar components and off-grid energy retailers in the country.

Furthermore, the CBN on September 15, 2020, announced the release of a term loan intervention fund to the tune of N200 billion to Family Home Fund Limited (FHFL) for financing the construction of social housing units for people on low income.

Interest rate for the three years tenor fund from the day of disbursement is put at 5% per annum (all inclusive).

Godwin Emefiele, governor of the CBN noted that So far, total disbursements from the Bank’s interventions in the wake of the COVID-19 pandemic amounted to N3.5 trillion including.

These include Real Sector Funds, (N216.87 billion); COVID-19 Targeted Credit Facility (TCF), (N73.69 billion); AGSMEIS, (N54.66 billion); Pharmaceutical and Health Care Support Fund, (N44.47 billion); and Creative Industry Financing Initiative (N2.93 billion). Under the Real Sector Funds, a total of 87 projects that included 53 Manufacturing, 21 Agriculture and 13 Services projects were funded. In the Health Care sector, 41 projects which included 16 pharmaceuticals and 25 hospital and health care services were funded. Under the Targeted Credit Facility, 120,074 applicants have received financial support for investment capital. The Agri-business/small and Medium Enterprise Investment Scheme (AGSMEIS) intervention has been extended to a total of 14,638 applicants, while 250 SME businesses, predominantly the youths, have benefited from the Creative Industry Financing Initiative. In addition to these initiatives, the CBN is set to contribute over N1.8 trillion of the total sum of N2.30 trillion needed for the Federal Government’s 1-year Economic Sustainability Plan (ESP), through its various financing interventions using the channels of Participating Financial Institutions (PFIS).

Ayodele Akinwunmi of FSDH Merchant Bank said last week that there are other overriding issues in the economy that are not monetary issues that need to be addressed and that the solutions to such problems are beyond what MPC can address.

Uche Uwaleke, Professor of capital market, Nasarawa State University Keffi, said, the CBN’S interventions in Agriculture, especially the Anchor Borrower Scheme, has helped in no small measure to grow the sector. It is time to expand and scale up the interventions to cover more products and States of the Federation.

‘ The intervention funds has supported growth in some of the critical sector and the negative growth would have been worse if not for the CBN intervention ‘

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