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Sustaining growth through concessionary interests on loans

The decision by the Central Bank of Nigeria (CBN) to again extend the five per cent interest rate on its intervention loans by another 12 months is part of measures by the apex bank to sustain the country’s economic growth, writes TONY CHUKWUNYEM

 

On March 16, 2020, the Central Bank of Nigeria (CBN), in a circular to deposit money banks (DMBs) and the general public, rolled out its initial set of palliative measures, which it said were aimed at supporting individuals, businesses and other stakeholders against the adverse impact of COVID-19.

 

Among policy measures announced by the apex bank in the circular was the extension of the moratorium period on all principal repayments on its facilities by one year. This meant that all intervention loans extended by CBN to financial institutions, which were under moratorium, were automatically extended by one year with effect from March 1, 2020.

The regulator also announced a reduction in the interest rate on all its intervention facilities, from nine per cent to five per cent per annum for one year, with effect from March 1, 2020. Also, as part of its policy measures to mitigate the impact of the pandemic on the country’s economy,

 

CBN, on May 27, 2020, announced that it had approved regulatory forbearance for the restructuring of credit facilities in the Other Financial Institutions (OFIs) sub-sector. Fundamentally, the scope of regulatory forbearance for the restructuring of OFIs’ credit facilities was similar to what the apex bank had approved for DMBs in March.

For instance, it included a further one-year moratorium for CBN’S intervention facilities offered through participating OFIS effective from March 1, 2020; a reduction of interest rates on intervention facilities through OFIS from nine per cent to five per cent per annum effective from March 1, 2020 and the grant of leave to OFIS to consider temporary and time-limited restructuring of the tenor and loan terms for households and businesses affected by the COVID-19 crisis.

 

However, given the fact that the global economy was still then reeling from the impact of the COVID-19 crisis, the banking watchdog, on March 4, last year, announced that it had extended the reduction of interest rates on intervention facilities through DMBs and OFIS from 9per cent to five per cent per annum to February 28, 2022. It also said that the roll-over of the moratorium on such facilities will be considered on a case-by-case basis.

 

MPC’s endorsement

In fact, in its meeting held in January last year, CBN’s Monetary Policy Committee (MPC) had called for the extension of the forbearance on intervention facilities and the retention of the five per cent interest rate on the loans for another 12 months. As the Deputy Governor in charge of Economic Policy at the apex bank,

 

Dr. Kingsley Obiora, put it in his personal statement at the MPC meeting, “the banking system has also maintained its stability and resilience during this crisis. Total gross credit rose to N20.48 trillion in December 2020, an increase from N19.72 trillion in November 2020 and from N17.57  trillion in the corresponding period of 2019.

Non-Performing Loans (NPLs) stood at 6.01 per cent in December 2020 compared to 6.06 percent in the corresponding period of 2019.

“This reflects strengthening of risk management practices, the Global Standing Instruction (GSI) policy and regulatory forbearance that has allowed banks to restructure credits impacted by CoviD-19. I am supportive of extending this forbearance by an additional twelve months, which would enable deposit money banks to continue providing reprieve to households and businesses through lower interest rates and repayment moratoriums.”

Even before the MPC meeting, the CBN Governor, Mr. Godwin Emefiele, in his address at the Chartered Institute of Bankers of Nigeria (CIBN) Annual Bankers’ Dinner held in November 2020, had noted that but for the measures that the apex bank instituted in the banking system to tackle the COVID-19 crisis, the country could have recorded a wave of firms’ bankruptcies along with rising unemployment, “which would ultimately have a significant impact on the balance sheet of banks.”

 

Emefiele said: “As a result of these measures, NPL ratios have remained low at 5.7 per cent. The capital adequacy ratio of the banking industry, at 15.5 per cent, remains above the prudential requirement per cent.

 

In addition, return on earnings in the banking sector was over 21 per cent as at October 2020. Similarly, Other Financial Institutions (OFIs) recorded a remarkable improvement as aggregate assets grew by N582 billion, or 16.94 per cent (year-on-year), to N4.02 trillion as at end-September 2020.”

Significantly, the CBN governor also said at the time that he was confident that Nigeria’s recession would be short-lived due to the apex bank’s policy measures.

 

He stated: “The impact of these measures along with the removal of restrictions on movement and resumption of international travel, led to improvement in key indicators of the economy, as several economic activities returned to positive growth. “

A sectoral assessment of economic activities in the third quarter indicates that the economy witnessed positive growth in key sectors such as information and communications technology, agriculture, health, construction, finance and Insurance and public administration.

 

The agricultural sector continued to record positive growth supported by productivity gains in the sector, interventions by government and improved demand for local produce.

“The Manufacturing Purchasing Managers Index, in the month of November, stood at 50.2 points, indicating an expansion in manufacturing activities after six months of contraction. A total of 18 sectors recorded positive growth in the third quarter relative to 13 sectors in the second quarter, which reflects significant improvement in economic activity.

 

“As a result of these measures, GDP growth in the third quarter 2020 improved to -3.6 per cent from -6.1 per cent in  quarter two, even though the economy fell back into a recession. We however expect that Nigeria would emerge from the recession by the first quarter of 2021, due to high frequency data that indicates continued improvements in the non-oil sector of our economy.”

Economic Growth

Indeed, not only did the performance of the economy surpass CBN’s expectations as it exited recession in Q4’20, the National Gross Domestic Product (GDP) Q4’ 2021 report released by the National Bureau of Statistics (NBS), recently, showed that Nigeria’s GDP grew by 3.40 per cent in 2021, the highest since 2014, when the economy grew by 6.22 per cent.

The report also indicated that the economy was largely driven by the non-oil sector, which accounted for 94.81 per cent of GDP while the oil sector contributed 5.19 per cent to growth.

Another extension

Still, with the International Monetary Fund (IMF) and the World Bank projecting sluggish growth rates for Nigeria this year, not too many would have been surprised that CBN again decided to extend the reduction of interest rates on intervention facilities through DMBs and OFIS from nine per cent to five per cent per annum by another twelve months.

According to Emefiele, who disclosed this at a Bankers’ Committee press briefing in February, the decision to extend the discounted interest rates on the intervention facilities was informed by the apex bank’s desire to continue to build on the achievements of its policy measures.

 

He stated: “Although interest rates on our various intervention facilities were expected to revert to nine per cent effective March 1, 2022, we are announcing that the rates would remain at five per cent for another year in view of the promising trajectory we have established in economic growth and job creation.

 

“In effect, the concessionary interest rate of five per cent on our intervention facilities would now be extended until March 1, 2023.”

Conclusion

The consensus in financial circles at the weekend was that although Nigeria’s economy has recorded five consecutive quarters of positive growth since it exited recession in the fourth quarter of 2020, the extension of the concessionary interest rate of five per cent on the apex bank’s intervention by one year is needed to maintain the positive momentum of the economy.

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