The Central Bank of Nigeria’s (CBN) battle to stabilize the foreign exchange markets and lower inflation expectations is becoming increasingly costly, data from its 2017 annual reports show.
The CBN’s interest expense (interest payable on any borrowings – bonds, loans, convertible debt or lines of credit) jumped significantly by 192.8 percent to N1.3 trillion in the financial year ended December 2017 compared to N459.3 billion recorded in the corresponding year of 2016.
The rise in the interest expense was as a result of increased Open Market Operation (OMO) auctions carried out by the CBN in the review period.
“The Bank adopted far-reaching strategies to stabilize the exchange rate and eliminate pressures from speculators, bettors, roundtrippers and rent-seekers. During the year, special foreign exchange windows for small and medium enterprises and for Investors-Exporters were established to increase market transparency, stabilise the rates, improve investment sentiments in Nigeria and bolster foreign exchange supply,” Godwin Emefiele, Governor of CBN said in the report.
Meanwhile, the jump in the apex bank’s interest expense contributed to the decline in the lender’s net income. CBN’s group net income for the year 2017 dropped by 13.7 percent to N107.3 billion from N124.4 billion in 2016 the previous year.
The draft annual report released by the apex bank on Wednesday 15th August 2018 showed that OMO issuances, which is a liquidity tool for CBN to control the amount of money in circulation rose by 44.7 percent to N11.3 trillion in 2017 from N7.8 trillion in 2016.
The average monthly OMO issuance stood at N945.5 billion in 2017 from N654.9 billion in 2016 and the average yield also increased to 19.43 percent in 2017 as against 14.60 percent, feeding directly into the higher interest expenses.
Ayo Akinwunmi, Head of Research at FSDH Merchant Bank said the liquidity management strategy of the Central Bank of Nigeria in the face of high interest rate environment on the government securities in 2017 increased its expenses.
“The CBN adopted various strategies to manage the exchange rate to ensure stability and inspire investors’ confidence in the Nigerian economy. All these efforts came with their associated costs,” Akinwunmi said.
Also the surge in the interest expenses could be attributable to an increase in outstanding Treasury bills by 9.2 percent to N3.58 trillion in 2017 from N3.28 trillion in 2016.
Loan impairment charge also known as write-downs for Non-Performing loans (NPLs) also increased by 375.8 percent to N347.01 billion in 2017 from N72.93 billion in the comparative period in 2016 causing a decline in the group’s net operating profit by 36.6 percent to N418.42 billion from N660.35 billion in the earlier period.
A further breakdown of the lender’s financial report revealed that the group made no financial sector intervention expense for the year 2017 but for the comparable period of 2016, it recorded N226.4 billion expense for financial sector intervention, while the total operating expense in the period under review was down 32.1 percent from N548.8 billion in 2016 to N327.6 billion in 2017.
CBN had given out a lot of intervention funds to banks which as a result caused the huge growth of NPLs.
The reduction in intervention expenses can be linked also to the drop in the total operating expenses by 40.3 percent to N327.64 billion in 2017 from N548.88 billion in 2016.
An insight of the group balance sheet showed an expansion in the total assets as it grew by 35.02 percent to N32.59 trillion in FY 2017 from N21.91 trillion in FY 2016.
The increase in assets resulted mainly from external reserves, loans and receivables, holdings of Special Drawing Right (SDR) and Quota in the International Monetary Fund (IMF).
The groups’ net operating income was therefore down 36.6 percent from N660.3 billion in 2016 to N418.4 billion in 2017.
Rafiq Raji, the Chief Economist at MacroAfrica Intel said the results suggest that the CBN’s liquidity-mopping efforts are increasingly costly.
“With cash-fuelled political activities likely intensifying from now till May next year, and the central bank reportedly even contemplating an interest rate hike at some point, the bank would likely bear even more costs,” Raji said.
HOPE MOSES-ASHIKE, ENDURANCE OKAFOR, CYNTHIA IKWUETOGHU
