The Monetary Policy Committee of the Central Bank of Nigeria on Tuesday said that the adverse macroeconomic environment, which had led to massive job losses and declining profitability, was making the banking sector less resilient.
The CBN Governor, Mr. Godwin Emefiele, stated the position of the committee while addressing journalists shortly after the two-day MPC meeting held at the headquarters of the apex bank in Abuja.
The governor, who read the communique issued at the end of the meeting, said the committee specifically expressed concern about the rising non-performing loan portfolio and declining asset quality in the banking sector.
He said the committee called on the CBN to work with Deposit Money Banks to quickly address the rising NPLs, declining asset quality, credit concentration and high foreign exchange exposures.
Out of the N18.53tn total loan portfolio of the DMBs operating in the country as of the end of last year, about N1.85tn or 10 per cent of the amount had become non-performing loans based on statistics released by the Nigerian Deposit Insurance Corporation last month.
This is above the five per cent regulatory threshold for the sector as stipulated by the CBN.
The CBN governor said, “On the outlook for financial stability, the committee noted that the banking sector was becoming less resilient as a result of the adverse macroeconomic environment. Nevertheless, the MPC reiterated its resolve to continue to pursue financial system stability.
“To this end, the committee enjoined the management of the bank (CBN) to work with the DMBs to promptly address the rising NPLs, declining asset quality, credit concentration and high foreign exchange exposures.”
Emefiele stated that the MPC also agreed to retain the Monetary Policy Rate at 14 per cent, noting that out of the 10 members who attended the meeting, nine voted to retain the rate, while one voted for an increase in the MPR.
He also said the committee retained other monetary policy parameters such as the Cash Reserves Ratio at 22.5 per cent; Liquidity Ratio at 30 per cent; and the Asymmetric Corridor at 200 basis points.
In arriving at these decisions, Emefiele explained that the committee considered the arguments of whether to further tighten, retain or loosen the rates.
From the standpoint of monetary tightening, the governor said the argument in support of this was strong and persuasive.
For instance, he said those in favour of tightening based their arguments on the conviction that the real interest rate remained negative, the upper reference band for inflation remained substantially breached and there was elevated demand pressure in the foreign exchange market.
The apex bank boss said, “The reality of sustained pressures on prices (consumer prices and the naira exchange rate) cannot be ignored, given the bank’s (CBN) primary mandate of price stability.
“However, tightening at this time would portray the bank as being insensitive to growth. Also, the Deposit Money Banks may easily reprice their assets, which would undermine financial stability.
“Besides, the committee noted the need to create binding restrictions on growth in narrow money and structural liquidity, and the imperative of macroeconomic stability to achieving price stability conducive to growth.”
On the argument for loosening, Emefiele noted that while the benefits of this would be in tandem with the needs of fiscal policy to restart growth, the MPC, however, noted that loosening would exacerbate inflationary pressures, worsen the exchange rate and further pull the real interest rate into negative territory.
He stated, “The counterfactual arguments against loosening was anchored on the upward trending month-on-month inflation and its impact on the exchange rate. Loosening would thus worsen the already negative real interest rate, widen the interest rate spread and reverse the positive outlook for the current account.
“Since interest rates are sticky downwards, loosening may not necessarily transmit into lower retail lending rates.”
The governor added that the CBN was optimistic that with the recent interventions in the foreign exchange market, where over $1.5bn had been released in the last three weeks, the difference between the official and parallel market rates would be further narrowed.
When asked if the CBN could sustain the recent interventions, Emefiele said that those who doubted the ability of the bank to take decisions and implement them were taking a great risk.
He noted that with the nations’ foreign reserves increasing to about $31bn, currency speculators would begin to suffer huge financial losses.
The CBN boss said, “Our reserves, as I speak to you now, is still trending upward and are almost at $31bn; and the fact that we have done this consistently for four to five weeks should tell everybody and those who doubt the strength of the central bank sustaining this policy that they are taking a risk and they will lose in this bid to want to place a wrong bet on the direction that we are going.
“The direction is that there is a determination to see to the convergence of those rates and with what we have seen so far, we are very optimistic that those (forex) rates will converge and all the elements in the foreign exchange market will begin to go down.”
He said the committee noted the consecutive positive contribution of agriculture to the Gross Domestic Product, adding that if properly implemented, the newly released Economic Recovery and Growth Plan as well as innovative and growth-stimulating sectoral policies would take the economy back to the path of growth.