The current reform of the banking sector by the new Central Bank of Nigeria governor is no doubt forcing bitter pills down the throat of bank directors and shareholders but the International Monetary Funds is not only throwingÂ its weight behind it but says it is the right path for the country to tread at the moment, Lucky Fiakpa writes
â€œIn the teamâ€™s view, and in line with our understanding of the central bankâ€™s intentions, it is important to articulate a monetary policy framework with a well defined nominal anchor. Effective communication of the framework, and its implementation, is critical in anchoring market expectations. Recent measures to ease domestic monetary conditions are appropriate and should help to bring down inter-bank interest rates and raise the growth of monetary aggregates.
â€œWe expect inflation to decelerate to single digit levels later this year reflecting the slowdown and credit conditions. Over time, it will be important to tackle the structural impediments that account for much of the high level of retail interest rates. Providing an enabling environment for development of a corporate bond market would also be a positive step,â€ the Fund said.
The apex bank is currently reforming the reporting system of the banks, introducing a strict regime of full disclosure of liabilities, with some banks now making full provisioning for their exposure to margin loans in the capital market. The CBN is also auditing the banks.
Credit to The Economy
As the financial regulators battle to sustain confidence in the banking sector, the International Monetary Fund has declared that the banksâ€™ credit level to the economy was on a high side. The Fund expressed concern that this might not be healthy for the economy. The credit to the economy, according to the CBN, was put at N7.4 trillion as at December 2008, with a particular bank lending as much as N188 billion.
Details from the apex bank show that 10 banks had given credit worth N5.2 trillion to the economy. Some officials of the apex bank are, however, alleging that some of the loans were without collaterals. According to the IMF, the credit to the economy by the banks raises â€œpotential concernâ€.
â€œIn terms of our indicators of potential concern, Nigeria has a credit account balance which is relatively high,â€ says Jose Vinals, Financial Counsellor and Director of the IMFâ€™s Monetary and Capital Markets Department.
According to Vinal, the growth of credit has been relatively fast for two years and there are loans that were not fully covered by the deposit base of the banks. â€œThe growth of credit has been relatively fast for the past few years and it has some lending which is not fully covered by the deposit base. We are not passing judgments on Nigeria, we can only call for financial policies,â€ he says.
By July 2009, some of the banks started calling for a stimulus package by the government for the banking sector. But the federal and state governments have been grappling with a N1.6 trillion deficit in their budgets, making intervention a bit more difficult, if not impossible.
Mr. Francis Atuche, Managing Director of Bank PHB, reportedly suggested a re-consolidation of the banking sector, â€œwith the bigger banks taking over the smaller banksâ€, to make the banks stronger.
Atuche says that a re-consolidation that will be focused on encouraging mergers will help some of the banks in the sector.
â€œIn Nigeria, the combination of two or more banks is perceived as a pooling together of strengths, competencies and capabilities. The emphasis is on synergy,â€ he says.
Atuche adds that banks must also be more innovative to meet the rising competitive business environment and the challenge posed by the global financial crisis.
â€œClearly, there is a stringent need to wean players off the dependence on public sector funds in the light of the prevailing circumstances. â€œThe fall in oil prices and the production short falls driven by OPECâ€™s restrictions and the Niger Delta crisis, means consistently lower oil and government revenues in the medium term,â€ he says.
Global Financial Crisis
Led by David Nellor, the IMF mission, which visited Abuja, the nationâ€™s capital and Lagos, Nigeriaâ€™s commercial city, met with Minister of Finance, Dr. Mansur Muhtar; Minister of National Planning, Dr. Shamsuddeen Usman; Governor of CBN, Sanusi; other members of the Economic Management Team; and senior officials and representatives of the private sector.
The mission noted that Nigeria entered the global financial crisis from a position of strength, stressing that reforms of recent years have paid off handsomely with oil savings, high international reserves, and a well-capitalised banking system, which prevented the type of economic crisis that Nigeria has witnessed too often at the end of earlier oil price cycles.
â€œNonetheless, the impact of the crisis has been significant. Lower oil revenues have driven the fiscal accounts and balance of payments into deficit. Oil and gas production remains constrained by security-related disruptions and activity in the non-oil sector also appears to be slowing. Nigeriaâ€™s capital markets have also been affected, but limited integration with the global financial sector has contained the impact,â€ the Fund observed.
The IMF, however, observed that Nigeriaâ€™s non-oil revenue activity was slowing down, corroborating the fact that the projected 51.8 per cent growth in the non-oil sector this year may not be achievable. Crude oil provides more than 90 per cent of Nigeriaâ€™s revenue and forms the mainstay of the economy, but the international price of the commodity has been dwindling since the third quarter of last year.
Given this challenge, the 2009 budget as announced by the Finance Minister, Dr. Muhtar, was targeted at widening the base for non-oil taxes through tax administration measures as well as focusing on expenditures that are growth enhancing. Specifically, non-oil revenue â€“ expected to be derived from tax – was projected to increase by 51.8 per cent from the N1.3 trillion achieved in 2008 to the N1.973 trillion projected for 2009.
But this seems toÂ haveÂ been a slipping target as the Federal Inland Revenue Service (FIRS) recently announced a drop of N124 billion in its tax revenue collection in the first quarter of 2009 â€“ from N477 billion to N353 billion.
Need for Credible Macro-Economic Policy
Consequently, the IMF team stressed the need for Nigeria to â€œemphasize the importance of developing a clear, consistent and credible macro-economic policy framework to help anchor expectations and reduce uncertainty, not only in this turbulent time, but also for the future. This framework will contribute significantly to providing a stronger enabling environment for private sector activity, which has a pivotal role to play in securing sustainable growth,â€™â€™ the report added.
The IMF teamâ€™s report also touched on fiscal policy and said the oil price rule would continue to be the best way to anchor the fiscal stance and provide adequate space for private sector-led growth, while meeting public spending priorities. â€œWe see the case for an accommodative fiscal stance in 2010 because growth this year and next is expected to fall below the impressive rates of recent years. The feasibility of delivering budget support for economic activity depends critically, however, on financing and administrative capacity, with caution warranted by the exceptionally uncertain outlook for the oil market,â€™â€™ the report said.
The report said the price of crude would likely pick up in 2010, â€œwhich would enable the scaling back of domestic borrowing from this yearâ€™s peak levelsâ€™â€™.
The report also noted that a peak in price of the commodity would give room for a recovery in borrowing by the private sector. â€œIn the teamâ€™s view and in line with our understanding of the central bankâ€™s intentions, it is important to articulate a monetary policy framework with a well-defined nominal anchor.
â€œEffective communication of the framework and its implementation is critical in anchoring market expectations. Recent measures to ease domestic monetary conditions are appropriate and should help to bring down inter-bank interest rates and raise the growth of monetary aggregates,â€™â€™ the report said.
It said inflation in the country, which rose to 15. 5 per cent in December 2008 and had been hovering at 14 to 15 per cent, would decelerate to single digit levels later this year, â€œreflecting the slowdown and credit conditionsâ€.
The report advised that the structural impediments that accounted for much of the high level of retail interest rates be tackled by the Ministry of Finance and the Central Bank of Nigeria (CBN). â€œFinancial stability has been sustained in the face of severe pressures relating to global and domestic developments.
â€œThis success reflects the well capitalised banking system and crisis related actions of the central bank. We welcome the assessment of bank balance sheets now underway as well as the authoritiesâ€™ renewed emphasis on developing a financial stability framework,â€™â€™ the report said.
Nigeria is Rich
Even though, the IMF very well supports the reform programme of the government, it does not think Nigeria needs external borrowings to accomplish the task. The Fund believes Nigeria is still rich enough to finance its projects despite the current economic crisis, and does not need to apply to IMF for programme financing.
The Managing Director of the fund, Mr. Dominique Straus-Kahn who stated this in a live video conference with Lagos, Accra and Johannesburg journalists a fortnight ago, observed that, what Nigeria needed was to properly manage its resources and develop sustainable infrastructure. According to him, $17 billion IMF fund was set aside to be given as grants to poor countries, which may need such funds for viable projects. Nigeria, he said, has no more need for IMF funds than that which it had accessed in the past.
Straus-Kahn said, though the IMF has not ruled out Nigeria from among the countries that will benefit from the interest-free grants, the country could only access the funds if the government presented credible projects that needed the grants. About 80 low-income countries, including African nations, will benefit from the short-term grant across the world.
The IMF boss explained that, any country applying for the fund should approach the IMF with details of the projects and how they intend to execute them. The IMF, Straus-Kahn said will scrutinize the projects and release the funds based on their assessment of the financing need of the projects.
Corroborating Straus-Kahnâ€™s view, Mrs. Antonie Sayeh noted that, Nigeria was now in a better position to manage its economy, even with its present foreign reserves of about $45 billion. She maintained that, if Nigeria sincerely needed the IMF financing, it should introduce appropriate mechanisms to grow the economy, such as growing the non-oil sector and build infrastructure.
She lauded the recent CBN policies, saying the reforms are important to Nigeriaâ€™s financial stability. â€œIf the Nigerian government can come to us and tell us we have a financing need, we will look at it and if she merits it, we will give them the grantsâ€, she assured.
That notwithstanding, the Fund generally supports the policy decisions taken by the Nigerian authorities, including fiscal and monetary easing, as well as tightened oversight of the banking system (in particular additional balance sheet scrutiny). That being said, it is to be hoped that the bulge in public sector borrowing is temporary, both taking into account expectations that energy revenues will rebound next year, and to provide more scope for the private sector to borrow when domestic demand recovers.
Interestingly, though, the IMF projects that inflation will decelerate into single digits by the end of the year, reflecting sluggish demand as well as stabilizing food prices. The IMF further said it would welcome progress in structural reform areas related to finance, particularly as many of these would reduce banksâ€™ costs and thus lending-deposit rate spreads as well.
Reduction or elimination of impediments to the opening of a corporate bond market would be welcomed across the board. The IMF was however silent on the exchange rate, probably because of its sensitivity.
With oil production continuing to slump and demand for foreign exchange remains stable â€“ and official reserves likely declining â€“ the central bankâ€™s ability to keep the naira close to 150/$1has dissipated. The latest reported figure on international reserves was USD 43 billion, and this represents a dip of about one-third from last autumnâ€™s peak.
It is doubtful if the authorities have target for reserves, but levels of about $40 are probably their minimum comfort level, given current conditions. The central bank covered only about one-third of demand in the recent wholesale auction for hard currency, yet the significant upturn in demand at the latest auction â€“ some $605 million â€“ may prove temporary, particularly if expectations of rising oil production prove prophetic.