IMF cautions CBN over loan policy, multiple exchange rate


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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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