Yemisi Izuora
The Chief Executive Officer, of the Center For The Promotion Of Private Enterprise, CPPE, Dr. Muda Yusuf, has said that urgent intervention policies should be pursued by the Central Bank of Nigeria, CBN, as the country’s economy grapples with severe adverse effects of depreciating exchange rate and soaring energy costs.
In one of his ten points agenda to the new CBN Governor, Olayemi Cardoso, Yusuf, said the Apex Bank, must ensure strategic and transparent intervention in the forex market to minimize volatility, as far as the reserves can support.
In addition to the I and E window, the CPPE, Chief said it has become necessary to create an autonomous window in the banking system where the currency can trade freely without any encumbrances, adding that “This is necessary to avert the diversion of remittances to other jurisdictions or the black market. We cannot afford to live in denial at this time.”
He said this is perhaps the most urgent task before the new CBN Governor, as he assumes the leadership of the Bank at a very crucial time in our economic history. “There is a serious confidence crisis in the foreign exchange market fueling an unprecedented speculative onslaught on the naira. The economy is grappling with severe adverse effects of depreciating exchange rate, soaring energy costs, ravaging inflationary pressures, huge backlog of foreign exchange obligations that needs to be cleared and debt service obligations that need to be redeemed. Sadly, these outcomes are manifesting at a time when the country’s foreign reserves have been substantially encumbered.” noted Yusuf.
He went further to state, “There is an apparent deceleration in the pace of economic reforms as the outcomes are at variance with expectations. The social costs of the reforms were substantially higher than anticipated, resulting in push-backs from the civil society.
“The economic management orthodoxy of market forces is being called to question in the light of the social outcomes of the market-oriented reforms. There is a measured re-emergence of political economy with the reappearance of fuel subsidy and divergence in exchange rates. This is evidently an economic management quandary that the new economic team would have to manage, and urgently too. And the CBN has a key role to play in this.”
He also noted that the clearance of the backlog of forex obligations should be accorded high priority to restore the confidence of domestic and foreign investors.
Yusuf, an economist also said that it is imperative to deepen the financial intermediation role of the deposit money banks, which is their primary role in an economy. This responsibility entails the mobilization of financial resources from the surplus end of the economy, to the deficit segment of the economy. Financial conditions remain very tight for the private sector amid challenges of access and cost of credit.
Banking system credit to the private sector in Nigeria, as at 2022, was a mere 20.6 per cent of the nation’s GDP, as sub-Saharan average of 28 per cent and global average of 145 per cent.
Besides, small businesses which account for an estimated 50 per cent of the GDP, have access to just about one percent of the credit in the banking system. The implication is that the banking system is still largely disconnected from the investing community, especially the small businesses in the economy. Financing gap in the small business space has been estimated at over N600 billion.
This anomaly needs to be corrected, he advised adding, “All these underscores the need to deepen synergy and complementarity between the banking system and the economic players, especially the MSMEs.
“The key metrics of the depth of the financial system include the ratio of financial assets to GDP; ratio of deposit liabilities to GDP; and ratio of money supply to GDP. Nigeria’s rating on account of these ratios is still very low, compared to other emerging economies. Therefore, deepening the financial system for stability is very critical.”
He also called for reduction of the ratio of non-interest income as a percentage of income of banks.
The ratio was 42.5 per cent two years ago and would have gone up by now given the numerous headwinds confronting investors in the economy while in most developing economies, the ratio is less than 30 per cent.
This income structure he said is a reflection of the failure of financial intermediation in the economy and needs to addressed.
The core function of the banking industry is financial intermediation and a situation where non-banking activities are crowding out the financial intermediation functions of the deposit money banks is detrimental to the growth of the economy, he stated.