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Role of sectoral credit allocation in Nigeria’s exit from recession

Many people are happy that Nigeria has exited the last recession, especially as the country’s economic data shows that we have gone through two recessions in the last five years, and this experience is not palatable to anyone. In a country with high unemployment and poverty rates, recession fears send cold down the spine of everyone.

In Q4 2020, Nigeria’s GDP growth rate was 0.11 percent, but the overall year on year growth for 2020 was -1.92 percent, meaning that it is not yet uhuru. The country’s exit from recession has much to do with sectoral allocation of credit. It is a known fact that capital is the lifeline of business which thrives when it receives capital in the required amount and at the appropriate time.

Against that backdrop, the total credit injection into the Nigerian economy in Q3 2020 grew by 22.3 percent to N19.86 trillion up from N16.25 trillion in Q3 2019. Basically, the Nigerian economy got N3.62 trillion injection across the different sectors in Q3 2020.

The five sectors with the highest growth in credit allocations were transport and storage; agriculture; construction; finance, insurance and capital market, and education.

Players in the nation’s transport and storage sub sector received credit facilities worth N503.95 billion in Q3 2020 in contrast to N375.41 billion in Q3 2019. On a quarterly basis, sectoral credit allocation to the transport and storage sub sector maintained an upward trend from Q3 2019 to Q3 2020. It rose by 19.5 percent in Q4 2019. There was another increase of 9.9 percent in Q1 2020. In Q2 and Q3 2020, sectoral credit to the transport and storage sub sector rose by 7.3 percent and 7.8 percent respectively.

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The effect of an increased funding to the sector could be seen in the improved sectoral GDP performance in 2020. At the peak of the lockdown in 2020, which was basically in Q2 2020, the transport and storage sub sector recorded a negative real growth rate of 49.23 percent. Before lockdown, real GDP growth rate was 2.82 percent in the first quarter of 2020. The partial lifting of lockdown produced a minimal effect on the sub sector which recorded a real growth rate of -42.98 percent in Q3, and -5.95 percent in Q4 2020.

Sectoral credit growth in the agriculture sub sector was 39 percent as of the reference period. On a quarter on quarter basis, growth in sectoral credit allocation to the agricultural sub sector averaged 9 percent from Q3 2019 to Q3 2020.

And in spite of the lockdown, the resilience of that sub sector ensured that every segment of the nation’s agricultural value chain, recorded a positive real growth. Overall, the nation’s agricultural sub sector ended 2020 with a 2.17 percent real GDP growth. Crop production outshined others as it grew by 2.24 percent in 2020. Livestock’s GDP grew by 1.91 percent; forestry rose by 1.62 percent, while fishing only grew by 0.26 percent.

Construction sub sector got N940.54 billion credit in Q3 2020, representing 30.2 percent increase on a year on year basis. Just like other aforementioned sectors, quarterly trend shows steady increase in sectoral credit allocation to this sector. From N722.63 billion in Q3 2019, credit rose marginally to N723.15 billion in Q4 2019. It further increased to N803.11 billion in Q1 2020; N859.16 billion in Q2 2020, and to N940.54 billion in Q3 2020.
The steady increase in construction sectoral credit allocation translated into better real GDP growth during the period. With a quarterly real GDP growth of 1.69 percent in Q1 2020; the construction sector recorded -31.77 percent growth rate in Q2 2020; 2.84 percent in Q3 2020 and 1.21 percent in Q4 2020, with a -7.68 overall growth rate in 2020.

The finance, insurance and capital market received sectoral credit to the tune of N1.40 trillion, amounting to an increase of 26.5 percent year on year in Q3 2020. Sectoral credit to this sector mirrored others with steady quarterly increase from Q3 2019 to same period in 2020. From N1.11 trillion in Q3 2019, sectoral credit allocation rose to N1.27 trillion in Q4 2019; N1.31 trillion in Q1 2020; N1.37 trillion in Q2 2020 and N1.40 trillion in Q3 2020.

What effect did this have on the finance, insurance and capital market sub sector? It actually caused a positive development as economic activities picked up in that sub sector. Real GDP growth rate for Q1 2020 was 20.79 percent, but moderated to 18.49 percent in Q2 2020. The reason for this high growth rate even when other sectors ended the quarter with a negative real growth rate was the switch to digital platforms during the lockdown. With banking halls closed to individuals, mobile and online platforms became the preferred options.

In addition, the capital became the most attractive investment option towards the end of 2020 following the CBN’s interest rate policy on savings accounts. Listed stocks, which were experiencing bearish runs at the beginning of the year, became the toast of investors from about September to year end 2020. Accordingly, the return in the nation’s capital market was about 50 percent in 2020, whereas yields on fixed income instruments were in single digit.

Source: NBS, BRIU

Effects of the declining Non-Performing Loans (NPLs
The Non-Performing Loans (NPLs) within the financial system decreased by 1.98 percent between Q1 and Q3 2020. Put differently, NPLs which stood at N1.14 trillion in March 2020 improved to N1.12 trillion in September of the same year. This is cheering news to financial institutions and creditors. The most improvement was recorded in the nation’s oil and gas sector whose players repaid N42.59 billion to bring the amount of NPL in that sector to N238.26 billion in Q3 2020 from N280.85 billion in Q1 2020.
NPLs equally declined in power and energy sub sector, where N15 billion was paid up. This may not be unconnected with the rise in the number of metered households. Also, financial institutions recovered N10.54 billion from those involved in general commerce, to bring that sectoral NPL to N160.14 billion in Q3 2020 from N149.60 in Q1 2020. The manufacturing sub sector was another area with improved NPL. With N13.63 billion recovered, manufacturing sectoral NPL reduced to N107.09 billion in Q3 2020 from N120.72 billion in Q1 2020.
On the contrary, NPL maintained an upward trend in three sectors during the period. Between Q1 and Q3 2020, the information and communication sector recorded additional N20.28 billion non-performing loans. Further, newly accrued NPL in the transport and storage sector was N14.04 billion and in the water supply, sewage, waste management and remediation activities, NPL increased by N11.53 billion during the period.

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