•Seeks FX market reset, suspension of naira redesign policy
From Uche Usim, Abuja and Merit Ibe
As the acting Central Bank of Nigeria CBN Governor, Dr Yemi Cardoso and his four deputies settle in after assuming office last weekend, the Centre for the Promotion of Private Enterprise (CPPE) has set a 10-point agenda for them.
The Director General of CPPE, Dr Muda Yusuf, revealed that the most urgent task is restoring confidence in the foreign exchange market.
Others are; deepening the financial system; efficiency of the financial system; capital requirements for banks; ways and means financing of fiscal deficit; naira redesign policy; concentration risk in banking sector; stakeholder engagement; corporate governance and tenure and cost of funds in the banking system.
As regards sanitising the foreign exchange market, Dr Yusuf said: “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 need 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.
“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”, Dr Muda told Daily Sun.
In deepening the financial system, he said it was imperative to deepen the financial intermediation role of the deposit money banks, which is their primary role in an economy. “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”, he explained.
With regards to the efficiency of the financial system, Dr Yusuf said the spread between deposit and lending rates in the Nigerian banking system is too high.
“It is an indication of serious efficiency issues in the banking system. In Nigeria, the spread is over 20 per cent, one of the highest globally. The average for sub-Saharan countries is 10 per cent and the global average is about 6.6 per cent. The large spread is detrimental to investment growth and disincentive to savings”, he noted.
He added that the minimum capital requirements of the banking industry need to be reviewed in the light of the considerable loss of value amid depreciating domestic currency.
“During the banking consolidation exercise of 2004, the minimum capital requirements for banks was raised from N2 billion to N25 billion.
“The revised capital requirement was an equivalent of $187 million. Today, the same N25 billion is an equivalent of just $32.5 million. This is a clear indication of the phenomenal erosion of the capital base of the banks. Recapitalization of the banks has, therefore, become imperative.
“It is important to ensure that the capital base of banks can support their current exposures in the interest of the stability of the financial system”.
On ways and means financing of fiscal deficit, he said it must be kept within statutory limits to avoid the damaging impacts of high-powered money on the macroeconomic environment. With regards to the naira redesign policy, Dr Yusuf said it should be suspended indefinitely. “It should not be a priority at this time. There was really no compelling argument to undertake the naira redesign in the first place.
“However, the momentum for the cashless economy should be sustained without resorting to the crude methodology of cash confiscation adopted by the previous dispensation in the CBN. The approach was very disruptive and inflicted unbearable hardships on businesses and the citizens”.
He also spoke about the tenure of funds in the country’s banking system, saying it is extremely short.
“Over 85 per cent of deposits in the banking system are less than one year tenure. This maturity structure of funds cannot support economic growth. What it means is that long term investment cannot be supported by our banking system.
“Doing so will result in serious mismatch of tenure which could pose a risk to the banks’ stability. In 2021, the banking industry recorded a negative asset -liability mismatch of N45.6 trillion, according to the NDIC. This is not healthy for the banking system and the economy.
“This is why there has been a dominance of development finance in the economy. Such intervention funds have vulnerabilities that could create challenges for the economy. There is a need to address the macroeconomic fundamentals to correct this maturity structure of funds in the banking system.
“Lending rate in the economy is very high and detrimental to investment and economic growth. SMEs pay as high as 30 per cent interest on loans. For non-bank financial institutions, the rates are even more atrocious. This is not conducive for investment growth and job creation. Bringing down the interest rate will require a mix of monetary and fiscal policies”, he said.