By Moses Obajemu
Banks’ credit to the private sector from June 2019 when the Central Bank of Nigeria (CBN) rolled out a new loan-to-deposit ratio expanded by over N1 trillion owing mainly to the differentiated cash reserve requirement (DCRR) and the minimum loan-to-deposit (LDR) ratio specified by the Apex bank during the year.
Edward Adamu, a member of the Monetary Policy Committee (MPC) who is also the CBN deputy governor, corporate services; and Sausi Rafindadi, another MPC member, disclosed this in their personal statements at the last MPC meeting.
Adamu said between January and October 2019, gross credit expanded by over one trillion naira (N1.0 trillion), with much of the increase actually occurring between June and October 2019.
“The sectors with the largest increases in credit during the period include agriculture, manufacturing, consumer credit and general commerce.
“Importantly, both measures (DCRR and LDR) had not resulted in rapid monetary expansion as key monetary aggregates continued to be significantly below their indicative benchmarks.
“I figured that the immediate risks to price stability were not necessarily emanating from the growth in credit, but more crucially from a variety of structural constraints in the economy, preventing efficient and effective circulation of goods, particularly food”, he said
While reviewing the economy in the last 11 months, Adamu said he identified two defining factors for the positive turnaround. According to him, credit to the real sector and the naira exchange rate, were pivotal in the turn around.
“On credit, the bank (CBN) has been able to turn around the situation through the LDR and the Global Standing Instruction (GSI) which aims to reduce credit risk. Given that interest rates have started to moderate and banking industry non-performing loans (NPLs) trending towards the regulatory 5.0 percent level, money market activities could only be expected to buoy in months ahead.
“Regarding the second element, the naira exchange rate, most analysts agree that its stability has been the central driving force of the current recovery. I also subscribe to this view.
“I would argue, therefore, that the most important medium-term challenge for monetary policy would be how to preserve the stability of the exchange rate of the naira. I recognize though that some of the associated mechanics like oil price and capital flows are a bit exogenous to domestic policy calibrations.
“As the outlook for the foreign exchange supply side continues to be uncertain, the Bank must manage the demand side effectively to keep the exchange rate stable. In this regard, the restriction on the use of foreign exchange remains relevant and the list of items-not-valid for funding from the foreign exchange market should, perhaps, be expanded to ease the pressure building on the current account”, he said.
Rafindadi noted that current data revealed that the growth in credit to the private sector increased from 12.49 percent in September 2019 to 13.08% in October 2019.
“The total credit increased by about N1.17 trillion in five months between the end of May 2019 and end of October 2019.
“The manufacturing sector received the highest share (of N459.69Billion), followed by retail & consumer (N355.11billion), general commerce (N142.98billion), ICT (N82.07billion), Construction (N74.52billion) and agriculture & forestry (N73.2billion).
“An additional credit flows of N2.17 trillion is expected between November 2019 and end of December 2019 to meet the 65% target for LDR.
“In addition, data showed that the decline in Non-Performing Loan (NPL) continued from the 9.4% achieved in July and August 2019 to 6.56% in October 2019 compared with 14.05% in October 2018. The significant decline is largely attributed to recoveries, write-offs and disposals. This welcome development would further encourage bank lending”, Rafindadi explained.