IMF cautions CBN over loan policy, multiple exchange rate – TheNigerialawyer

THE International Monetary Fund (IMF) on Wednesday cautioned the
Central Bank of Nigeria (CBN) over risks associated with the new
loan policy requiring banks to lend at least 65 per cent of their
deposits or be sanctioned.

The Fund also raised concerns over the implementation of
multiple exchange rates by the apex bank, urging the regulator to
move towards a uniformed market-determined exchange rate.

Led by Amine Mati, Senior Resident Representative and Mission
Chief for Nigeria, the IMF team gave this position at the end of
its visit to Lagos and Abuja between September 25 and October
7.

The team, which discussed recent economic and financial
developments, said banking sector prudential ratios were
improving.

It, however, said new regulations to spur lending should be
carefully assessed and may need to be revisited, in view of the
potential unintended consequences on banks’ asset quality, maturity
structure, prudential buffers and the inflation target.

The IMF team said: “Managing vulnerabilities arising from large
amounts of maturing Central Bank of Nigeria (CBN) bills—including
those held by non-residents – requires stopping direct central bank
interventions, the introduction of longer-term government
instruments to mop up excess liquidity and moving towards a uniform
market-determined exchange rate.

“Continued strengthening of banks’ capital buffers would enhance
banking sector resilience. Structural reforms, particularly on
governance and corruption and in implementing the much-delayed
power sector recovery plan, remain essential to boosting prospects
for higher and more inclusive growth.”

The team said it held productive discussions with senior
government and central bank officials.

“It also met with representatives of the banking system, the
private sector, and international development partners. The team
wishes to thank the authorities and all those it met for the
productive discussions, excellent cooperation, and warm
hospitality,” it said.

According to the Fund, Nigeria’s slow economic recovery is
continuing, inflation is falling, and external buffers are
declining in the face of increased portfolio outflows.

The team said: “The pace of economic recovery remains slow, as
depressed private consumption and investors’ wait-and-see attitude
kept growth in the first half of the year at two per cent, a rate
significantly below population growth. Headline inflation has
fallen, reaching its lowest level since January 2016, helped by
lower food price.

“Spurred by one-off increases in imports, the current account
turned into a deficit in the first half of 2019 after three years
of surpluses. Gross international reserves have fallen to below $42
billion at end-August 2019, mainly reflecting a decline in foreign
holdings of short-term securities and equity. The exchange rate in
various windows remained stable, helped by steady sales of foreign
exchange by the Central Bank of Nigeria (CBN).

The team added that the carryover from 2018 to 2019 increased
public investment spending in the first half of the year, but
revenue underperformed significantly relative to the budget target
in the first half of 2019.

“Over-optimistic revenue projections have led to higher
financing needs than initially envisaged, resulting in
over-reliance on expensive borrowing from the CBN to finance the
fiscal deficit.

“The Federal Government interest payments continue to absorb
more than half of revenues in 2019. The outlook under current
policies remains challenging. Growth is expected to pick up to 2.3
percent this year on the strength of a continuing recovery in the
oil sector and the regaining of momentum in agriculture following a
good harvest.” According to the IMF team, revenue initiatives
planned under the 2020 budget—including a VAT reform that increases
the rate, introduces a minimum registration threshold and exempts
basic food products- will help partially offset declining oil
revenues and the impact of higher minimum wages, thus keeping the
overall consolidated fiscal deficit elevated.

“The current account’s shift to a deficit is expected to persist
while the pace of capital outflows continues to weigh on
international reserves. Inflation will likely pick up in 2020
following rising minimum wages and a higher VAT rate, despite a
tight monetary policy.

“A comprehensive package of measures—whose design and
implementation will require close coordination within the economic
team and the newly-appointed Economic Advisory Council—is urgently
needed to reduce vulnerabilities and raise growth.

“The increasing CBN financing of the government reinforces the
need for an ambitious revenue-based fiscal consolidation that
should build on the initiatives laid out in the Strategic Revenue
Growth Initiative. A tight monetary policy should be maintained
through more conventional tools.”

Reacting to the report, spokesman for the Minister of Finance
Budget and National Planning Yunusa Tanko Abdullahi, said:
“overall, the report is good because it acknowledged the effort of
government in improving the economy through transparency and
inclusiveness.”

According Tanko Abdullahi, “the IMF team acknowledged the
‘decreasing inflation rate’ which has continued for nine
consecutive quarters. The report also emphasized that ” growth is
expected to pick up to 2.3% this year on the strength of a
continuing recovery in the oil sector and the regaining momentum in
agriculture following a good harvest.”

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