The International Monetary Fund (IMF) has cautioned that the perception of policy ineffectiveness and yet-to-be fulfilled election promises are stoking social tensions in Nigeria. This according to the fund could complicate policy implementation.
The IMF also pointed out that the challenging economic conditions are diminishing support for “an administration praised by many for its anti-corruption efforts, but accused of not having delivered on the economy, notably for the most vulnerable”.
The fund stated this in its 90-page 2017 staff report and statement by its executive directors on Nigeria, which was released thursday.
According to the Washington-based donor institution, political uncertainty surrounding President Muhammadu Buhari’s health, inadequate coordination among economic policymakers and across tiers of government, more inward policies, and political maneuvering ahead of the 2019 elections could further delay urgent actions on necessary reforms.
The report also pointed out that banking system vulnerabilities had increased in Nigeria, adding that asset quality deteriorated over the past year with non-performing loans (NPLs) doubling to 13 per cent by end-2016 (and could have been higher in the absence of loan restructuring).
This, it stated, contributed to reducing capital adequacy ratios (CAR) from 17.7 per cent in December 2015 to 14.8 per cent in 2016.
“Various proactive measures were introduced to contain risks to financial stability, including increased provisioning, strict limits on net FX positions, prohibition of dividend payments (for banks with NPLs higher than 5 per cent), and regulatory forbearance on provisioning and breaches of single obligor limits.
“As of December 2016, three banks (about 5 per cent of assets)—including one internationally active one— were undercapitalised (with CARs below 8 per cent).
“Some weak banks have been frequent users of the CBN’s liquidity window,” it added.
The fund restated that economic growth in Nigeria would pick up only slightly to 0.8 per cent in 2017, mostly reflecting recovering oil production, strong performance in agriculture, and favorable base effects.
“Policy uncertainty, crowding out, and FX market distortions would continue to drag on activity, with non-oil non-agricultural output staying relatively flat throughout the medium term.
“This would lead to worsening labour market and poverty outcomes.
“Accommodative monetary policy—assumed to continue to finance a widening fiscal deficit and support priority sectors—would keep inflation in double digits.
“Financing constraints and risk aversion by banks would crowd out private sector credit and increase the federal government’s already high debt service burden,” it added.
But, the report stressed that linkages between the real and financial sectors weigh on the outlook, arguing that lack of foreign exchange (FX) in the economy and policy uncertainty would keep economic growth sluggish and weaken corporate performance and increase the likelihood of NPLs.
It stated that this would make banks seek to limit credit risk by tightening lending standards, reducing credit to the private sector, and continuing to invest in government securities.
Furthermore, the fund noted that Nigeria remains vulnerable to global inward spillovers, “but can itself generate significant regional outward spillovers”.
“The key inward spillover is via oil prices, which has both a direct impact on FX availability and budget financing and an indirect impact through capital inflows. Outward spillovers arise through trade and financial channels,” it explained.
“A tighter monetary policy stance is important for anchoring inflation expectations and supporting external adjustment.
“The signal on the monetary policy stance continues to be clouded by the CBN’s pursuit of multiple objectives, including efforts to finance the government (N2.3 trillion of overdrafts and converted bonds in 2016) and support growth, which have led to overshooting of the broad money target.
“Market interest rates have moved up towards the upper band of the CBN’s interest rate corridor due to the FX auction-induced liquidity squeeze, but that signal has been mixed.
“Risks are to the downside, but with upside potential from stability in the Niger Delta and a rebound in investor confidence.
“Downside risks include continued disruptions in oil and gas production arising from militancy activities; further delays in policy implementation; limited capacity to implement the targeted scaling-up of capital expenditure; further deterioration in banking sector soundness indicators; and a higher external market premium for sovereign bonds.
“With Nigeria accounting for an estimated 70 per cent of ECOWAS exports and 17 per cent of imports in Sub-Saharan Africa, the trade and remittance channels are particularly strong to neighboring countries, some of which have raised concerns about Nigeria’s recession and the effect of the naira devaluation and FX restrictions on their exports.
According to it, “However, staff analysis indicates that overall activity in Nigeria’s neighbours has held up well recently, with the oil price shock representing a positive terms-of-trade dividend for all neighboring countries except Chad.
“About a dozen Nigerian banks have significant operations in Sub-Saharan African countries, with Nigerian subsidiaries holding more than 20-30 per cent of deposits in Benin, Gambia, and Sierra Leone.
“However, risks to operations of subsidiaries arising from a slowdown in Nigeria are limited, since activities of subsidiaries are in part ring-fenced from their parent banks and direct cross-border positions are not typically large relative to their host economies, and subsidiaries are mostly locally funded,” it added.
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