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Inflationary pressure, naira devaluation to increase banks’ operating expense

Here’re 5 strategies to protect your business from volatile FX market

Inflationary pressure, naira devaluation and salary reviews are expected to increase operating expenses of Nigerian deposit money banks, according to Ayokunle Olubunmi, head, financial institutions ratings at Agusto &Co.

Operating expenses in banks refer to the costs incurred by a bank to maintain its day-to-day operations and provide banking services to its customers.

Some of the common components of operating expenses in banks include employee salaries and benefits. These include wages, salaries, bonuses, and benefits paid to bank staff, including tellers, loan officers, customer service representatives, and administrative personnel.

Speaking the bi-monthly forum of the Finance Correspondents Association of Nigeria (FICAN) in Lagos recently, Olubunmi explained how the level of interest rate, inflation rate and the rate of foreign exchange will drive Nigeria’s GDP growth to 2.6 percent in severe case scenario, 3 percent as a base case scenario, but at best, will not exceed 5 percent this year.

Nigeria’s headline inflation has continued its upward trajectory, reaching 29.90 percent year-on-year as of January. This marks a steady increase in inflationary pressures within the country’s economy. The latest data, released by the National Bureau of Statistics (NBS), underscores the persistent challenges facing Nigeria’s economic landscape.

In a recent statement, financial expert Olubunmi emphasized the pivotal role of interest rates as a tool wielded by monetary policy authorities to tackle inflation and stabilize exchange rates in Nigeria’s economic landscape. According to Olubunmi, prevailing conditions indicate a pressing need for higher interest rates, attributing pressure on the naira partly to the low interest rate environment, which tends to dampen economic activities.

Anticipating the upcoming Monetary Policy Committee (MPC) meeting, expectations are rife that the Central Bank of Nigeria (CBN) might opt for a substantial interest rate hike, possibly by 500 basis points. However, concerns linger over the potential adverse effects on government expenditures, given the substantial borrowing by the Nigerian government. A significant increase in interest rates could inflate the cost of servicing government debt, potentially dissuading the MPC from implementing overly aggressive rate hikes.

Analyzing potential interest rate scenarios, Olubunmi projected an average rate ranging from 16 percent to 18 percent for the year, with an estimated floor of 15 percent. Notably, recent trends in treasury bill rates reflect this sentiment, with the 364-day bills soaring to 19 percent per annum.

On the inflation front, Olubunmi highlighted the multifaceted nature of the challenge, citing insecurity as a significant driver. With insurgency and kidnapping rampant in key agricultural regions, supply chain disruptions exacerbate inflationary pressures. Nigeria’s inflationary woes have persisted for 11 consecutive months, hitting a new peak in December 2023 at 28.92 percent, according to the National Bureau of Statistics (NBS).

Exchange rate fluctuations further compound inflation concerns, particularly as Nigeria heavily relies on imports. The rising cost of importation, fueled by currency depreciation, threatens to escalate inflation and stifle economic growth. Olubunmi stressed the importance of addressing various factors affecting inflation to realize the inflation targeting goals set forth by the CBN governor.

Looking ahead, Olubunmi underscored the significance of Nigeria’s oil revenue in shaping foreign exchange earnings, predicting a dip in crude oil prices from the 2023 average of $80 per barrel to around $70 to $75 per barrel in 2024. Additionally, he cautioned that Nigeria’s crude oil production is unlikely to exceed 1.5 million barrels per day in 2024.

As Nigeria grapples with mounting inflationary pressures and economic uncertainties, policymakers face the daunting task of striking a delicate balance between combating inflation and supporting sustainable economic growth.

Managing operating expenses effectively is essential for banks to maintain profitability and competitiveness in the market while ensuring the delivery of high-quality services to customers. Banks typically aim to optimize their operating expenses while balancing the need for investment in technology, infrastructure, and employee training to meet evolving customer demands and regulatory standards.

The Non-Performing Loans of the Nigerian Deposit Money Banks is predicted to rise in 2024 following economic slowdown, according to Olubunmi.

Addressing these factors typically requires a combination of measures, including improving credit risk management practices, enhancing regulatory oversight, promoting economic stability, and implementing sound corporate governance standards within banks.