By Kayode Tokede
The Central Bank of Nigeria (CBN) governor, Mr. Godwin Emefiele has said commercial banks exposure to private sector increased by N2 trillion between May and December of 2019.
The apex bank last year had mandated commercial banks to maintain 65 per cent Loan-to-Deposit Ratio (LDR).
Following the CBN policy on LDR, leading commercial banks were forced to lend to real sector of the nation’s economy.
The CBN governor speaking at first Monetary Policy Meeting (MPC) of 2020 noted that funds was channeled primarily to the employment-stimulating sectors such as agriculture and manufacturing, in addition to increased lending to the retail and Small & Medium Enterprises (SME) segments, which is expected to help boost domestic output growth in the short to medium term.
He expressed that, “To retain the gains from credit expansion and current industry focus on lending, the Committee advised the Bank to sustain its LDR Policy and in addition continue to deploy its DCRR policy which directs new funding for greenfield projects and expansion to critical sectors of the economy.”
At the end of the meeting the MPC members voted to increased Cash Reserve Requirement (CRR) by 500 basis points from 22.5 to 27.5 per cent, while leaving all other policy parameters constant.
On increasing CRR, he said, “the committee was confident that increasing the CRR at this time is fortuitous as it will help address monetary-induced inflation whilst retaining the benefits from the Bank’s LDR policy, which has been successful in significantly increasing credit to the private sector as well as pushing market interest rates downwards.
“The Committee further encouraged the Management of the Bank to be more vigorous in its drive to improve access to credit through its pursuit of the Loan-to-deposit, v ratio policy as doing this would help, not only in creating job opportunities but also help in boosting output growth and in moderating prices.”
He disclosed that the committee observed that broad money supply (M3) grew by 6.22 per cent (year-to-date) in December 2019.
According to him, “Aggregate Credit (Net) similarly grew to 27.33 per cent in December 2019, from 23.12 per cent in the previous month. This was largely attributed to an increase in Credit to Government, which grew to 92.95 per cent in December 2019, from 72.36 per cent in the previous month.
“Credit to the Private Sector also grew to 13.61 per cent in December 2019, from 12.82 per cent in the previous month. Consequently, sectoral distribution of credit between end-May 2019 and end-December 2019 was as follows: manufacturing (N446.44 billion); General Retail and Consumer Loans (N419.02 billion); General Commerce (N248.48 billion); Agriculture, Forestry and Fishing (N160.94 billion); Information and Communications (N156.47 billion); Finance and Insurance (N129.87 billion); Construction (N86.54 billion); and Transportation and Storage (N68.61 billion), amongst others.”
He urged the management of the Banks to sustain the current momentum of improved flow of credit to the private sector, while exploring other options with the fiscal authorities to strengthen the legal framework for the enforcement of credit recovery.
He explained that the committee noted the persistent increase in the inflation rate, which stood at 11.98 per cent in December 2019.
“It also noted that the inflation was driven by both monetary and structural factors. Having addressed the monetary factors, the headroom for further monetary policy measures has become constrained, being supported by empirical evidence which suggests that inflation above 12.00 per cent is inimical to output growth in the Nigerian economy.
On Considerations he said the members thus called on the fiscal authorities to speedily address legacy structural impediments giving rise to upward-trending price developments.
“Amongst these, the Committee identified infrastructure deficit and the long-standing clashes between herdsmen and farmers, which are constraining domestic production and contributing substantially to the rise in food inflation. The MPC, therefore, urged the Federal Government to relentlessly seek innovative ways of addressing security challenges across the country in order to boost aggregate food supply.
“The Committee further noted the contribution of imported food and other tradeables to the rise in price levels but emphasized the opportunity to ramp up production of domestic substitutes supported by the Bank’s development finance initiatives, particularly in agriculture and manufacturing sectors.
The Committee noted the improvement in the financial soundness indicators, growth in assets of the banking system and the gradual switch in the composition of DMB assets from investments in government securities to growth in credit portfolio.
“It, however, noted that lending rates at the retail segment of the market had remained fairly sticky downwards as deposit rates had declined substantially. It also noted that in some cases, DMBs were not encouraging term deposits in their portfolios and therefore, emphasized the Bank’s commitment towards the implementation of the LDR policy.”
On fiscal operations, he said the committee applauded the Government for the recent signing of the 2020 Finance Bill which opens a new vista of opportunities in public financial management.
“The MPC, however, cautioned that public debt was rising faster than both domestic and external revenue, noting the need to tread cautiously in interpreting the debt to GDP ratio. The Committee also noted the rising burden of debt services and urged the Fiscal Authorities to strongly consider building buffers by not sharing all the proceeds from the Federation Account at the monthly FAAC meetings to avert a macroeconomic downturn, in the event of an oil price shock.”