Days after the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) rose from its recent review of the state of the economy and outlining of fresh policy adjustments, including much desired rate cuts, stakeholders have stated that it is not yet uhuru for the real sector.
This is despite the CBN’s admission that there is a huge funding gap in the sector and the consequent reduction in the Monetary Policy Rate (MPR) and Cash Reserve Ratio (CRR) during the meeting last week.
Arising from the session, the apex bank had reduced the MPR by two basis points to 11 per cent from 13 per cent, the first time it had done so in the last six years.
It also cut the CRR by five basis points to 20 per cent from 25 per cent as well as changed the symmetric corridor of 200 basis points around the MPR to an asymmetric corridor of +200 basis points and -700 basis points, respectively.
But stakeholders have expressed reservations about the steps taken by the CBN, saying the volume of reduction was too marginal to bring down the cost of funds.
Mr. Henry Boyo, a renowned economist and industrialist, opined that with the MPR at 11 per cent, it means that commercial lenders would still be lending at above a single digit interest rate, which is still inimical to the growth of the manufacturing sector.
He argued that the CBN has not been properly handling its core function, which is managing money supply; thereby resulting in incessant excess liquidity is the economy.
According to him, if this is not urgently addressed, the reduction in MPR and CRR would not achieve the intended impact in the real sector.
Mr. Boyo noted that the 5 per cent cut in CRR would only make more funds available to banks to invest in treasury bills and bonds, which are less risky when compared with lending to the manufacturing sector.
Mr. Emma Nwosu, former Managing Director of the defunct ACB International, told BH that the reduction in MPR is supposed to bring down the cost of funds, but it may not eventually turn out to be so because the marginal lessening of the MPR is insignificant in the short-run to spur the commercial lenders to resume lending to the productive sector of the economy.
He stated that however, the reduction shows that the CBN is on the same page with the present administration that has promised to pursue an expansive economy.
He reasoned that banks would still prefer to invest in government instruments and lend to big corporations, unless the apex bank coerces them to lend to MSMEs, because of the high risk involved.
“Fundamentally, when CRR and at the same time MPR are reduced, it should lead to an increase in lending at a more comfortable rate. It now depends on how banks channel their increased lending space.
“If the CBN is actually compelling them to lend to SMEs, and the productive sector of the economy, which it will follow through, they may be bound to lend them to the productive sector,” he elaborated.
He stressed that if the commercial lenders are let alone, they would be lending to their more comfortable zones- import and export and other areas where they are sure the money would be paid back.
Dr. Ambrose Oruche, chief economist, Manufacturers Association of Nigeria (MAN), said the reduction was long expected, saying that was what the Nigerian economy needed at this point in time.
He however expressed disappointment that MPR is still in the double digit range, noting it means manufacturers still have to borrow at double digits.
“Not the short-run the reduction in MPR and CRR may not make significant impact in the economy, but on the medium term yes,” he opined.
Dr. Oruche asserted that if MPR was single digit, banks would be forced to lend to the manufacturing sector.
“I know there is money in the banks, but they prefer to buy risk-free investments that would give them a higher return than investing in the economy,” he added.
He posited the banks would not effect this downward review of interest rate and would continue to invest more in treasury bills and bonds, because they maintain their perception about lending to the real sector.
Dr. Vincent Nwani, Director, Research and Advocacy, Lagos Chamber of Commerce and Industry (LCCI) also lauded the downward review of the MPR and CRR, saying it was an indication that the apex bank was listening to the cry by the organised private sector for the reduction of lending rate to single digit in the country, so that SMEs would be able money to do business.
He however, argued that the two per cent reduction in MPR may not be enough to bring back business to the banking hall.
“Today, small and large businesses are borrowing money at 25 per cent and 30 per cent interest rate respectively, and if borrow from microfinance, it is as high as 60 per cent, because you have paid 5 per cent monthly.
“But the step taken by the CBN was not holistic, because there is still need to reduce other barriers to lending like rigid collateral system and other fees and fines such as management fees, insurance fees etc.” he further explained.
He allayed the fear that the reduction in interest would further worsen the country’s inflation rate, explaining that the reduction was too marginal to push inflation up.
He was of the opinion that even without the MPR and CRR review, inflation rate had been on the increase.
Meanwhile, concern over the immediate future of the Nigerian economy is growing by the day and a consensus view is that the economic outlook is grim. Both local and international analysts believe that the economy is entering a tail spin if current fiscal and monetary policies being implemented to shore up the naira were not changed.
Besides, the Central Bank of Nigeria’s (CBN) restricted access to foreign exchange, which has led to down-grading of the nation’s sovereign bonds and rating, experts also believe that the current economic management team of the government lacks the capacity and expertise to manage the economy out of the woods.
Also, state governments after a meeting of the National Economic Council, NEC, declared that they were broke and can no longer continue to pay the minimum wage of N18, 000.
Both the Economist magazine and Bloomberg insist that the current finance minister, Mrs. Kemi Adeosun, is not the right candidate for the job. This point was also made by Prof. Chukwuma Soludo, former CBN governor in a speech last week.
Investment banking firms had predicted that the restriction placed on forex would pressure the banking industry profitability. However, some banks declared an impressive third quarter result which was majorly helped by growth in non-interest income. Analyst said that the CBN will devalue the naira by second quarter.
Meanwhile, as the economy drought continues to bite the citizens due to declining business activities at macro and industries level, the apex bank is asking banks to ration forex for their customers.
Already, banks are struggling to find enough dollars to meet existing obligations to customers and some have to rely on foreign loans which are often times not stable. The CBN told commercial lenders at a meeting last week that it plans to cut dollar supplies to the market because reserves are running short.
Also, the apex bank indicates that it will not devalue the local currency, Naira, in spite of several market adjustments that showed that Naira is currently playing at above the face value.
CBN has again decided not to devalue and will only sell as many dollars to banks or currency dealers as it receives from oil exports, which amounts to about $1 billion a month. While importation of goods has been drastically impacted on the downward side, neither the monetary nor fiscal arm of the government has done much to push the real economic sector.
Analysts are of the view that the reduction in forex supply would further tighten importation of goods and services into the country starting from the fourth quarters of the fiscal year. But, the wavering real sector of the economy performance leave less to be desire in exportation of Nigeria’s made goods, services or commodities.
They said that this would place limit on economic activities that are expected to push the Federal Government revenue generation; thereby curtailing further the earlier estimated growth target for the economy.
According to data provided by the Nigerian Bureau of Statistics, economic growth slowed to 2.8 per cent on an annualized basis in the third quarter from 6.2 per cent a year earlier. The rate will slump to 3.9 per cent in 2015, the lowest since 1999, according to the median estimate of 10 economists surveyed by Bloomberg.
Despite the recent bailout funds which the Federal Government extended to the States, the individual States are still neck deep in huge debts. Those who thought the bailout fund was for the States to resolve their debt challenges missed the point, as loans can sometimes constitute additional burden. Indeed, the bailout was too little too late. Hence the governors are asking for more.
Unfortunately, the states were only given longer term FG bonds which will help them solve short term challenges of salaries and other immediate recurrent expenditures. But one sober issue is that the loan reprieve does not remove the huge debt over hang on their necks. Whereas the loans are rising by the day, the doomsday is only being shifted.
”We asked for a lot of money, we owe pensioners over N30 billion and putting everything together we asked for money to take care of some of the debts but what was approved for us was only a bit over N10 billion and we have to attend to the state, attend to local government, attend to the pensioners and we must realize that even that money is not free; it is money that was loaned from the banks to the states for which we are making payments and we are paying interest and the much we can give to local government councils is also a loan”, said Governor Ifeanyi Okowa of Delta State.
If this is the condition of Delta state, one of the richest state governments in the country in terms of statutory allocations from the Federation Account, then the challenge confronting less endowed states comes into stark reality. Delta reportedly owes N600 billion.
More worrisome is that the States keep increasing their debt profile by going for more loans and fully depending on hand-outs from the FG through states allocation. Already, according to reports about 16 states of the federation have raised bonds totalling N520 billion in the last seven years.
The Debt Management Office (DMO) statistics revealed that 36 states of the Federation owed N1.6 trillion internally as at December 2014. Details show that Lagos State owes the highest with N268billion followed by Delta State with N211bn. While Cross River owes N107bn, Rivers State owes N91bn and Bayelsa N91bn. Other State that owe hugely include; Akwa IBOM N81bn, Plateau Stae N78bn among others.
The snag in the development is that these bonds are backed by Irrevocable Standing Payment Orders (ISPO) for monthly deductions from their statutory allocation into Sinking Fund Accounts (SFA) managed by trustees for the benefit of bond holders. The implication is that no amount of shortfall in a state’s allocation from the federation account can stop the repayments for the bonds before any allocation goes to the states.
For instance, filings by state governments at the Nigerian Stock Exchange (NSE) showed that as at the end of 2013, Kogi State so far has N5 billion bond while Lagos State has raised a total of N187 billion. In addition, the figures showed that Osun State had raised N30 billion including a N11.4 billion sukuk. Others include: Kwara – N17 billion, Niger – N15 billion, Kaduna – N8.5 billion, Rivers – N250 billion, Gombe – N20 billion and Edo – N25 billion. Benue, Ebonyi, Ondo, Ekiti, Bayelsa, Imo and Delta states have also raised N13 billion, N16.5 billion, N27 billion, N25 billion N50 billion, N18.5 billion and N50 billion respectively. While we could not establish the statuses of these bonds now, market observers are almost sure that some of are part of today’s debt problems of the States.
Interestingly, even with the fear that states may be plunging their finances into the red, some of them are going on another borrowing spree.
This is due to current contingent liabilities inherited from the past regimes, such as pensions, contractors, salaries etc.
Edo State Governor, Adams Oshiomhole, who recently took another loan, claimed that his government was forced to take a $75 million development loan from the World Bank.
Equally, Governor Nyesom Wike of Rivers state’s borrowing of N30 billion from Zenith Bank has raised concerns in the state.
BY FELIX OLOYODE & JULIUS ALAGBE