Business

Managing oil, power sectors’ bad debts, liquidity menace

 

 

 

The revelation came last week directly from the National Bureau of Statistics (NBS); a whopping N270.97 billion of the loans advanced by Nigerian banks to power, oil and gas firms have gone bad.

In a report sighted by New Telegraph penultimate weekend, the NBS noted that the debt profile to the two sector had now hit N5.83 trillion. Why should a crisis from the two sector become a burden to banks?

Facts and figures

The bad loans recorded by banks in the power sector rose by 6.17 per cent to N32.71 billion from N30.81 billion, the document read.

“The amount of non-performing loans in the oil and gas sector declined by N30.53 billion to N238.26 billion in Q3 from N268.79 billion in Q2,” it added.
Meanwhile, the total debt owed by power and energy firms to the banks rose, according to NBS, to N732.68 billion in Q3 from N712.93 billion in the previous quarter.

Sapping banks of energy

“The debts owed by energy firms to Nigerian banks rose by N200 billion to N5.85 trillion in the third quarter of this year,” the document said further.
The N5.85 trillion represents 29.44 per cent of the N19.87 trillion loans advanced to the private sector as of the end of September.

Oil and gas firms, which received the biggest share of the credit from the banks, increased their debt by N180 billion to N5.12 trillion in Q3 from N4.94 trillion in Q2.

The total debt owed by power and energy firms to the banks rose to N732.68 billion in Q3 from N712.93 billion in the previous quarter, the NBS data showed.
Oil prices’ angle to the narrative

 

A global credit rating agency, Fitch Ratings, noted in a December 8 report that Nigerian bank asset quality had historically fallen with oil prices, with the oil sector representing 28   per cent of loans at the end of the first half of 2020.

It said the upstream and midstream segments (nearly seven per cent of gross loans) had been particularly affected by low oil prices and production cuts.

 

“However, the sector has performed better than expected since the start of the crisis, limiting the rise in credit losses this year due to a combination of debt relief afforded to customers, a stabilisation in oil prices, the hedging of financial exposures and the widespread restructuring of loans to the sector following the 2015 crisis,” it said.

 

The rating agency predicted that Nigerian bank asset quality would weaken over the next 12 to 18 months.

It said debt relief measures had prevented a material rise in impaired loans in 2020.

 

Fitch, however, forecasted that the average impaired loan ratio would range between 10 per cent and 12 per cent by the end of 2021 as these measures come to an end.

NERC report on viability, liquidity

The Nigerian Electricity Regulatory Commission, in its latest quarterly report, said the financial viability and commercial performance of the Nigerian electricity supply industry continued to be a major challenge.

 

It said the liquidity challenge was partly due to the non-implementation of cost-reflective tariffs, high technical and commercial losses exacerbated by energy theft, and consumers’ apathy to payments under the widely prevailing practice of estimated billing.

 

Managing liquidity menace

The pervasive phenomenon of excess liquidity in the developing countries has continued to be of concern as it stands to distort any economy    In Nigeria liquidity crisis in the system started in the early 1980s and it is still persisting therefore defying all solutions proffered by the regulatory body since that time.

The funds outside the banking system constitute a major bottleneck to the effective working of any policy aimed at controlling liquidity and other variables like inflation, exchange rate and interests rates.

A professor of Economics at the University of Ibadan, who went all the way to do a research sponsored by Magnum Trust Bank Plc, Professor Ademola Ariyo, said that in spite of the existence and activities of relevant intermediation institutions and financial sector regulatory agencies, excess liquidity has become persistent macroeconomic headache for Nigeria over the years.

 

Giving insight into what excess liquidity is, Ariyo said that it was the margin by which the aggregate liquidity in the economy exceeds the optimum level.

 

However, he said there existed a desire level of liquidity that would ensure that macroeconomic stability is maintained in the economy and that quantum of liquidity can be refereed to as the optimal level of liquid.

According to Ariyo, the persistence of excesses liquidity suggests the inadequate of the current liquidity management process and strategy.

Oil burden

Talking about the excess liquidity, the professor explained that externally driven, oil sector dominates public revenue and the ensuring fiscal operations of government does the major source of excess liquidity in Nigeria.

 

According to him, an incisive  

reflection suggests that the limited capacity of the country to absorb this huge resources flows from the oil and gas sector to equivocally the overriding cause of the problem.

 

Specifically, he said the public revenue from oil was not being utilised for expanding the nation\’s economic base through development of its real sector.

 

This situation is being further aggravated by the short term tenor of bank lending due to the nature of their sources of deposits, mainly government accounts, thus precluding longer terms leading to the directly productive real sector of the Nigerian economy,” he said.

 

Ariyo said that the government, which is adjudged the major cause of excess liquidity, was also considered the greatest benefactor of its management strategy employed by Central Bank of Nigeria (CBN) while the private sector is the worst victim.

 

Furthermore, on causes of excess liquidity, he stated that while fiscal operations of government is the overriding cause of the liquidity problem in the country, banking system credit to the public sector is another major cause.

It, therefore, appears that the problem of (excess) liquidity revolves around the public sector in Nigeria,” he said.

Last line

The depth of effect oil and gas sectors’ liquidity has on the banking sector should be a major cause for concern and quick action should be taken by all stakeholders to nip the crisis in the bud.

 

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