CBN Must contain Rising Banking Sector Risks, Says IMF
…seeks More Ambitious Tax Reforms, Increase In Excise Duties
The International Monetary Fund on Wednesday called on the Central Bank of Nigeria to contain rising banking risks in the country, while also commending the regulator for its recent decision to stop weak banks from paying dividends to shareholders.
Against the backdrop of huge non-performing loans, which have weakened the capital base and asset quality of the country’s Deposit Money Banks, it also called on the apex bank to carry out an asset quality review in order to identify any potential capital need among the lenders.
The call came in the IMF’s Article IV Consultation, an annual appraisal of a country’s economy, which was released in Washington DC, United States.
The report came a few days after an IMF team completed its Article IV Consultation visit to Nigeria for 2018.
The IMF executive board assessment report read in part, “Directors stressed that rising banking sector risks should be contained. They welcomed the central bank’s commitment to help increase capital buffers by stopping dividend payments by weak banks.
“They called for an asset quality review to identify any potential capital need. They noted that an enhanced risk‑based banking supervision, strict enforcement of prudential requirements, and a revamped resolution framework would help contain risks.”
The proposed asset quality review by the IMF will help the CBN to determine if banks have made adequate provision for NPLs and that whether the loans are properly classified, according to experts.
It will also help the regulator to know if some banks have adequate capital.
The level of the NPLs in the industry is currently at 14 per cent, far above the five per cent recommended by the CBN.
Some local experts said the CBN might ask the banks, which have their NPLs above the industry average, to recapitalise so as to avoid insolvency.
The Washington-based lender, however, commended the CBN for maintaining a tight monetary policy stance, just as it lauded it for its foreign exchange policy, which has attracted forex inflow to enhance exchange rate stability.
The report further stated, “Directors commended the central bank’s tightening bias in 2017, which should continue until inflation is within the single digit target range. They recommended continued strengthening of the monetary policy framework and its transparency, with a number of directors urging consideration of a higher monetary policy rate, a symmetric application of reserve requirements, and no direct central bank financing of the economy. A few directors urged confirmation of the appointments of the central bank’s board of directors and members of the monetary policy committee.
“Directors commended the recent foreign exchange measures and recent efforts to strengthen external buffers to mitigate risks from capital flow reversals. They welcomed the authorities’ commitment to unify the exchange rate and urged additional actions to remove remaining restrictions and multiple exchange rate practices.”
The IMF also said the Nigerian economy was slowly exiting recession but remained vulnerable because its growth was tied to oil prices and improved revenues were restricted to the energy and agriculture sectors.
The Nigerian economy had emerged from its first recession in 25 years in the second quarter of 2017.
The recession was largely linked to low crude prices and militant attacks on oil facilities.
Higher oil prices and an end to the attacks mostly accounted for the end of the recession.
“The Nigerian economy is slowly exiting recession but remains vulnerable,” the IMF said in the report.
It added that the economy had been helped by higher oil prices, improved access to foreign exchange and foreign reserves rising to a four-year high.
The Washington-based lender, however, noted that the improvements had not yet boosted non-oil and non-agricultural activities.
“Lower oil prices, tighter external market conditions, heightened security issues, and delayed policy responses are the main downside risks,” it added.
To address these vulnerabilities, the IMF team stressed that comprehensive and coherent policy actions remained urgent.
In addition to ongoing efforts to improve tax administration, the IMF directors underlined the need for more ambitious tax policy measures, including through reforming the Value Added Tax, increasing excise, and rationalising tax incentives.
They said the implementation of an automatic fuel price‑setting mechanism, sound cash and debt management, improved transparency in the oil sector, increased monitoring of the fiscal position of states and local governments, and substantially scaled-up social safety nets should support the adjustment.
The report further stated, “Directors emphasised that structural reform implementation should continue to lay the foundation for a diversified private‑sector‑led economy. They noted that, building on recent improvements in the business environment, implementing the power sector recovery plan, investing in infrastructure, accelerating efforts to strengthen anti‑corruption and transparency initiatives, and updating and implementing the financial inclusion and gender strategies remain essential.
“Directors welcomed the continued improvement in the quality and availability of economic statistics and encouraged further efforts to address remaining gaps.”
The IMF also commended the progress in implementing the Economic Recovery and Growth Plan, including the start of a convergence in foreign exchange windows, tight monetary policy, improvements in tax administration, and significant strides in improving the business environment.