‘CBN economic stimulus yields result in second half of 2020’

These initial fiscal and monetary policy responses to the COVID-19 crisis have been successful at least in protecting worker’s jobs and ensuring that firms have access to liquidity.

The Nigerian respond is similarly anchored on the on-going CBN interventions – the N50 billion household and SME facility, out of which N49.195bn has been disbursed to over 92,000 beneficiaries, N100bn healthcare and N1.0 trillion manufacturing and agricultural interventions alongside significant interventions in other growth enhancing sectors.

This intervention has been pushed with the vigour that sustained credit to the real economy – particularly for SMEs and households – will be crucial to economic recovery.

The depressed oil export earnings amid the COVID-19 pandemic weighed in heavily on the fiscal revenue for 2020. Generation of non-oil revenue is also facing considerable challenges in 2020 because of the low level of domestic economic activities even with the recent increases in the rate of VAT from 5.0 percent to 7.5 percent before the COVID-19 pandemic.

 Government’s recent efforts have been to marginally reduce the expected recurrent expenditures in 2020, whilst increasing borrowing so as to maintain current capital spending.

There are however concerns that increased dependence on borrowing with oil prices still at low levels will see the already elevated debt servicing costs soar in the coming years.

The last meeting of the Monetary Policy Committee observed the gradual, but persistent decline in the Manufacturing and non-Manufacturing Purchasing Manager’s Indices (PMI), below the benchmark.

The Manufacturing PMI declined to 41.1 index points in June 2020 from 42.4 index points in May 2020. Conversely though, the nonmanufacturing PMI improved to 35.7 index points in June 2020 from 25.3 index points in May 2020.

The trend in the manufacturing and non-Manufacturing PMI was attributed, largely, to: slower growth in production levels; new domestic orders; employment rate; raw materials supply; and new export orders. The Committee noted the staff forecast of 1.03 percent contraction in growth in Q2 2020, on the back of the continued adverse impact of the pandemic on the economy

The Committee reiterated the need for a robust fiscal policy strategy to attract private investment and capital, to finance the huge infrastructure deficit in Nigeria, and strengthen the existing initiatives by the federal government and the CBN in this direction.

Speaking on the impact of the CBN intervention, Deputy Governor, Financial Systems Stability Ahmad, Aishah Ndanusa said: “the financial system has remained resilient albeit with regulatory support. Staff reports presented at the meeting show marked increase in the number of loans restructured; as at July 20, 2020, 22 banks submitted requests to restructure 35,639 loans of businesses impacted by the pandemic, representing 41.92 percent of the total industry loan portfolio.

“This has partly reflected an improved industry risk profile, as the Non-Performing Loans ratio declined from 6.6 percent in April 2020 to 6.4 percent in June 2020. Net interest margin remains robust despite lower interest income, perhaps due to much lower industry interest expense, as market deposit rates continue to decline.

“ The Loan-to-Deposit Ratio (LDR), Global Standing Instruction, streamlining of access to Open Market Operations securities and other complementary measures have been strong tail winds which have strengthened intermediation – via increased lending to the key sectors such as manufacturing, agriculture and consumer markets (gross credit grew by an additional N300bn from N18.6tn to N18.9tn between end-April and end-June 2020, respectively) and lower market lending rates, which have insulated the financial system from the worst impact of the pandemic.”

The committee report noted that aggregate domestic credit (net) grew by 5.16 per cent in June 2020 compared with 7.47 per cent in May 2020.

The Committee commended the CBN Loan-to Deposit Ratio (LDR) initiative to address the credit conundrum as the total gross credit increased by N3.33tn from N15.56tn at end-May 2019 to N18.90tn at end-June 2020.

These credits were largely recorded in manufacturing, consumer credit, general commerce, and information and communication and agriculture, which are productive sectors of the economy.

Also commenting on the intervention, the CBN Deputy Governor, Corporate Services Directorate, Adamu Edward Lametek said: “In fact, most analysts believe that the economy contracted in Q2 2020. There are, nevertheless, reasons to expect improvement in the second half of the year.

“First, as from July, we expect the impact of the economic stimulus by the Federal Government and the CBN to start showing – in fact, the Bank’s in-house business outlook survey has so suggested.

“Second, after hitting the floor during the lock-down, economic activity could pick-up much faster than currently estimated to compensate for losses in Q2, particularly as credit to the real sector continues to grow. Technically, the next 2 to 3 months should witness businesses racing to meet pent-up demand in many sectors of the economy. The third basis is seasonality – 13 Classified as Confidential the period, August – October, traditionally witnesses substantial harvest of farm produce, which comes with increase in commerce and related activities”

Lametek further stated that it is gratifying to note that the economy has received and continues to receive substantially higher amounts of credit compared with periods of similar crisis in the past.

He said: “Between June 2019 and June 2020, total credit rose by N3.46tn (about 22 percent), of which new credit in June 2020 alone accounted for N773bn, up from N412.7bn in May 2020. The number of new credits (recipients) similarly rose by about 42,000 to 93,578 from 51,700 in May.

“The huge credit output in the economy was underpinned by improved resilience of the banking system. As at end-Q2, most financial soundness indicators (FSIs) performed well relative to regulatory benchmarks. In spite of macroeconomic challenges, banking industry tier one capital accounted for 87.22 percent of the total qualifying capital at end-June 2020; capital adequacy ratio (CAR) stood at 14.96 percent with non-performing loans (NPLs) ratio of 6.4 per cent and provision ratio of 118.9 per cent.”

Also speaking on the interventions, the Acting director General of the Manufacturers Association of Nigeria (MAN), Ambrose Oruche said: “A lot of our members signified interest in the N1 trillion Manufacturing Intervention but you know that this things takes some time and process and off course has to go through the commercial banks. And since it borders on money, you also have to justify the demands.

“We all have a responsibility to get manufacturers’ productivity to increase by addressing infrastructure deficit, port congestion so that we can encourage production which in turn leads to increased employment.”