IMF counsels CBN to review loan to deposit ratio to avoid banking crisis

The International Monetary Fund (IMF) has asked the Central Bank of Nigeria (CBN) to reconsider the minimum loan to deposit ratio to avert banking sector crisis.

The international financial organisation also called on the federal government to institute a more unified exchange rate regime for the nation’s currency and embark on significant revenue mobilization to create space for higher social spending and reduce fiscal risks and debt vulnerabilities.

IMF stated these in a statement issued on Friday, following the conclusion of its 2020 Article IV Consultation with Nigeria conducted virtually from October 30 to November 17, 2020.

According to the statement signed by Jesmin Rahman, the team leader, “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.”

IMF stated that given the current weak transmission and record low market interest rates, further cuts in the Monetary Policy Rate (MPR) would not provide additional support to the economy. It, therefore, said that in the medium term, the operational monetary policy framework, along with policy strategy and communication, should be strengthened to establish the primacy of price stability.

On the effects of COVID-19 pandemic on the economy, IMF noted that low oil prices and sharp capital outflows significantly increased balance of payments (BOP) pressures and, together with the pandemic-related lockdown, resulted in the contraction of the economy and increased unemployment all of which culminated in pushing up headline inflation to a 30-month high.

According to the statement, “Under current policies, the outlook is challenging. Real GDP is projected to contract by 3¼ per cent in 2020. The recovery is projected to start in 2021, with subdued growth of 1½ per cent 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 (CBN) 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.”

IMF lauded the federal government’s decision to remove fuel and energy subsidies and asked the government to embark on the more ambitious broad market and exchange rate reforms.

“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,” IMF said.

It added, “A durable solution to Nigeria’s recurrent BOP problems requires recalibrating exchange rate policies to reduce BOP risks, instil market confidence and facilitate private sector planning. 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.

“The mission welcomed this year’s reduced dependence on central bank financing of the budget and recommended its complete removal in the medium term. This 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.”

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