CBN Mulls New Credit Mechanism for Real Sector @ Single Digit

To encourage banks to give credit to the real sector of the economy, at single digit rates, the Central Bank of Nigeria (CBN), has offered to complement the effort of Deposit Money Banks (DMBs) through a mechanism to support banks that lend to corporate entities at single digit rate.

Addressing journalists at the end of the Monetary Policy Committee (MPC) Meeting in Abuja, which saw the retention of all monetary rates, the CBN Governor Mr Godwin Emefiele disclosed that the mechanism “is not meant to bring competition among Deposit Money Banks, but it is meant to complement their efforts.”

According to Emefiele, “the most important thing is that we want to see to it that we achieve a single digit rate. We believe this will work because rather than the banks keeping the money in the reserves they can key into this and promote these transactions as long as they meet the terms and conditions.”

Specifically, Emefiele said “a differentiated dynamic cash reserve requirement regime will be implemented to direct cheap long term bank credit at nine per cent and a minimum tenor of seven years and two years moratorium to the employment elastic sectors of the economy.”

Details of this framework he said are being worked out by the banking supervision and the monetary policy departments and will be released very soon stressing that more details on this new mechanism “will be provided soon for the banks and everybody to know.

MPC was concerned that credit to the economy was sliding and we looked at means to incentivize the Deposit Money Banks to increase credit to the real sector.”

The MPC was of the opinion  that while it is difficult to encourage job creation in an environment within deficit infrastructure, the committee believes that the bank should continue to encourage Money Deposit Banks to increase the flow of credit to the real economy to consolidate economic recovery.

To achieve this, Emefiele noted that two approaches were considered: the first approach, in order to achieve the objective of lowering interest rate particularly to those priority sectors- manufacturing sectors, agric sector, the CBN “will encourage large corporates to issue commercial papers/note to the market and there will be a memorandum that will detail explanations of what they are going to do with that money.”

In order to complement the effort of the banks, the CBN he said “will expect that this commercial papers will come at low rate of single digit of 9 per cent or below that and for long tenor at least a period of 7 years with a specific purpose for that loan.”

If central bank sees that kind of notes in the market, Emefiele noted that the “CBN will complement the effort of the banks through a mechanism to support that bank that lends to that corporate at single digit rate.

It is not meant to bring competition in the money deposit banks, it is meant to complement their efforts. The most important thing is that we want to see to it that we achieve a single digit rate.”

The second approach he said is “if a bank lends money for new projects and planned expansions, verifiable not refinancing, to a project for seven years inclusive of two years moratorium at 9 percent interest rate, that the bank providing this evidence and verified by the central bank, we will go into that bank’s CRR and release equivalent of that cash from our CRR at zero kobo spread.”

Emefiele explained further that “in this case, that bank earns its 9 percent of that money. We feel this is novel; it is something that we should give a chance.

In the past we have reduced CRR and release liquidity into the market but the liquidity was not channeled properly to the high impact corporations – we mean employment generating sectors or output improving sector of the economy.”

Updating journalists on the Chinese Currency swap deal, the CBN Governor revealed that they “opened the first auction last week Friday and the result from that auction will be released on Friday, but from the preliminary information I heard is that it was a successful auction. The details will be unfolded by Friday.”

About the declining foreign reserves from $47.7 billion in May to $47.2 billion in June, Emefiele said “this has nothing to do with politics. What is happening is as a result of US Fed normalisation.

Since the interest rate has gone up in the US, and other advanced economies, in an attempt to stimulate their economies, these money that moved into the emerging economies have now being taken back and this means there will be so much outflow of cash than inflow of cashflow, and of course we have our own share of it.”

He noted that “Nigeria has performed better than other emerging market around the world, with a stabilized exchange rate that has remain stable because we have been able to build enough buffer to support our currency and that is why the exchange rate has remain stable.

Countries like South Africa and others have had their currencies depreciated but the Naira remains stable at N360/$ at this time.”

Speaking on the outcome of the MPC meeting in general, Emefiele said “MPC commended the approval of the Federal Government’s 2018 budget and called for the accelerated implementation to further support the fragile growth recovery.”

The committee also called for sustained implementation of the Economic Recovery and Growth Plan (ERGP) to further stimulate output growth.

However, the MPC was “concerned about the liquidity impact of the 2018 expansionary fiscal budget and increasing FAAC distributions due to rising prices of crude oil as well as the buildup in election related activities.”

Exactly two years after the MPC decided to hold rates at 14%, at the end of Tuesday’s  meeting, MPC again voted to retain the: Monetary Policy Rate (MPR) at 14.0%; Cash Reserve Ratio (CRR) at 22.5%; Liquidity Ratio at 30.0%; and Asymmetric corridor at +200 and -500 basis points around the MPR.

Defending the MOC’s decision, Emefiele stated that “in the discussion for a hold, it was noted that risk to the macroeconomic and financial environment appears fairly balanced with improvement in output growth and inflation.”

Holding policy at the current stand he said “will support growth and further moderate inflation. However, committee noted the appetite of the public for loosening and concern that hold MPR at 14 per cent since July 2016 and considering the dynamic nature of the market, the rates might have lost its signal effect on the market, hence dampen market expectations.”

“The argument in favor of maintaining the current policy stand, is to monitor the magnitude of the liquidity impact of the fiscal injections and elections related expenditures ahead of the 2019 elections” he explained.