VICTORIA ONU, ABUJA
THE International Monetary Fund has called on the Central Bank of Nigeria to review its Loan to Deposit Ratio Policy.
The CBN had on July 3, 2019, directed banks to maintain a minimum LDR of 60 per cent by September 30, 2019.
The LDR, which is being reviewed quarterly to improve lending to the real sector, was 58.5 per cent as of the end of May.
It has now been raised to 65 per cent for the last quarter of last year.
Through the policy, the CBN has been able to provide funds for key sectors of the economy, such as manufacturing sector, which got N866bn, consumer credit, N527.6bn; oil and gas, N477bn; agriculture, N287bn; and construction, N270bn.
But the IMF in its 2020 Article IV Mission to Nigeria said that the policy should be reviewed because of the risk to financial stability associated with pushing credit possibly to higher-risk clients.
The IMF staff team was led by Jesmin Rahman to conduct a virtual mission from October 30 to November 17, 2020 in the context of the 2020 Article IV Consultation with Nigeria.
Rahman at the end of the consultation said that the mission welcomed notable progress in narrowing gender and regional gaps in access to financial services, including through fostering financial literacy, agency banking and use of fintech.
Rahman said, “While the banking sector has been resilient, thanks to the ample pre-crisis buffers, the mission recommended vigilance and corrective actions to prevent an increase in financial stability risks arising inter alia from increasing non-performing loans.
“In this connection, debt relief measures for clients should remain time-bound and limited to clients with good pre-crisis fundamentals, in line with existing regulations.
“The minimum loan to deposit ratio should be reconsidered because of the risk to financial stability associated with pushing credit possibly to higher-risk clients.
“Regarding financial inclusion, the mission welcomed notable progress in narrowing gender and regional gaps in access to financial services, including through fostering financial literacy, agency banking and use of fintech.”
On Nigeria’s economy, the IMF said real Gross Domestic Product was contracting, inflation increasing, and external vulnerabilities remained large.
It called on the government to embrace major policy adjustments and broad market reforms to stimulate the economy.
The IMF noted that exchange rate and monetary policy reforms, increased revenue mobilisation and structural reforms would help to unlock Nigeria’s growth potential.
It said, “The COVID-19 global pandemic is exacting a heavy toll on the Nigerian economy, which was already experiencing falling per capita income and double-digit inflation, with limited buffers and structural bottlenecks.
“Low oil prices and sharp capital outflows have significantly increased balance of payments pressures and, together with the pandemic-related lockdown, have led to a large output contraction and increased unemployment. Supply shortages have pushed up headline inflation to a 30-month high.
“Under current policies, the outlook is challenging. Real GDP is projected to contract by 3.25 percent in 2020. The recovery is projected to start in 2021, with subdued growth of 1.5 percent and output recovering to its pre-pandemic level only in 2022.
“Despite an expected easing of food prices, inflation is projected to remain in double-digits and above the Central Bank of Nigeria’s target range, absent monetary policy reforms.
“Following a significant decline in revenue collections—from levels that were already among the lowest in the world—fiscal deficits are projected to remain elevated in the medium term.
“There are significant downside risks to this near-term outlook arising from the uncertain course of the pandemic both globally and in Nigeria.
“Recognising the gravity of the situation, the Nigerian authorities have undertaken commendable and timely measures to counter the pandemic’s impact on lives and livelihoods.
“The authorities have also taken courageous steps to remove costly and untargeted subsidies in the power sector, which were largely benefiting better-off households.
“But more needs to be done. Major policy adjustments embracing broad market and exchange rate reforms are needed to address recurrent BOP pressures and raise the medium-term growth path.”
On the country’s Balance of Payment problems, the IMF said that a durable solution to Nigeria’s recurrent BOP problems required recalibrating exchange rate policies to reduce BOP risks, instil market confidence and facilitate private sector planning.
It said, “The adjustments in the official exchange rate made earlier this year are steps in the right direction and the mission recommended a multi-step transition to a more unified exchange rate regime, with a market-based, flexible exchange rate.
“Significant revenue mobilization including through tax policy and administration improvements is required to create space for higher social spending and reduce fiscal risks and debt vulnerabilities.
“With high poverty rates and only a gradual recovery in prospect, revenue mobilization will need to rely initially on progressive and efficiency-enhancing measures, with higher VAT and excise rates awaiting until stronger economic recovery takes root.”
While welcoming this year’s reduced dependence on central bank financing of the budget, the IMF recommended its complete removal in the medium term.
This, it added could be accomplished by improving budget planning and public finance management practices to allow for flexible financing from domestic markets and better integration of cash and debt management.
It said, “The mission also welcomed fiscal transparency measures introduced to facilitate tracking and reporting of budget emergency funding.
“The mission welcomed the recent submission of the Petroleum Industry Bill to the Parliament. The Fiscal Framework chapter of the bill appropriately rebalances the government take in onshore/offshore production, with the aim of providing a fair share to the government while remaining attractive to investors.”
On the structural front, the IMF said the approval of the power sector recovery program financing plan, the ratification of the African Continental Free Trade Area, and the completion of key road projects were positive steps.
Going forward, the mission recommended decisive actions to tackle governance weaknesses and implement regulatory and trade-enabling reforms, including the lifting of trade restrictions, to unlock Nigeria’s strong growth potential.
