The Central Bank of Nigeria (CBN) has said the anticipated economic damage due to the COVID-19 pandemic requires vigilance to mitigate emerging risks in the banking system.

The Deputy Governor, Financial System Stability Directorate, CBN, Mrs. Aisha Ahmad, said this in her personal statement at the last Monetary Policy Committee (MPC) meeting, a copy of which was posted on the bank’s website yesterday.

According to her, the effects of the pandemic, which has continued to spread, “requires heightened vigilance by the bank to mitigate emerging risks and other complementary measures such as the restructuring of credit lines for existing obligors and provision of liquidity backstops as and when required to safeguard the financial system.”

The deputy governor said stress tests conducted by CBN staff under low to moderate scenarios had revealed that the financial system remained resilient in the face of tightened financial conditions. However, she stated that under severe stress scenarios, certain vulnerabilities in the system were evident.
These, according to her, included reduction in earnings, deterioration in asset quality and decline in capital adequacy.

“The Nigerian economy is facing a significant and unprecedented shock from the COVID-19 pandemic, accentuated by idiosyncratic structural deficiencies.

“It must forestall an imminent severe health crisis, whether a global economic crisis and maintain financial and macroeconomic stability in the light of exchange rate pressures, low foreign exchange flows from crude oil receipts amidst a severely constrained fiscal space and low reserve buffers.

“Like other central banks, the Bank has limited policy options in this circumstance. As it works in collaboration with the fiscal authorities to limit the humanitarian and economic costs of the pandemic, it will be prudent to focus on structural reform and the long term objective of diversifying the economy to enhance its global competitiveness,” Ahmad stated.

According to her, initiatives designed to boost local food and manufacturing production, improve import substitution and support local businesses to meet domestic demand, whilst positioning for export and participation in the global supply chain must be sustained.

In his contribution, the Deputy Governor, Corporate Services Directorate, CBN, Mr. Edward Adamu, recommended that the federal government should set up a trust fund to support the informal sector as part of the overall response to the fallout of the pandemic.

In addition, he said effective coordination of responses and some understanding of sectoral impact of the pandemic would be important in ensuring efficient allocation of resources and attainment of superior outcomes.

On his part, the Deputy Governor, Economic Policy Directorate, Dr. Kingsley Obiora, explained that in the light of a somewhat hazy economic outlook, the central bank must remain vigilant and retain the flexibility to act at short notice.

This, he said, was because no one knows the length and depth of potential effects of the pandemic on key macroeconomic variables.

“But it does appear that the net effect of the associated temporary supply shocks and the reductions in the price of petrol would be a slight moderation in both inflationary and related fiscal pressures in the coming months.

“At the moment, many financial sector indicators suggest that the industry remains safe and sound, but several downside risks may materialise in the short term, particularly those related to loan exposures.

“This implies that both the central bank and deposit money banks must be ready with nimble and effective strategies to contain and/or mitigate these risks.

“That is why I support the recent policies by the central bank that grants regulatory forbearance allowing banks to restructure existing loans, while also providing immediate reprieve to households and businesses through interest rate reduction and a moratorium on both new and existing loans,” he said.

He added that the policies would provide direct credit facility to the healthcare industry and strengthen the loan-to-deposit ratio policy to ensure greater flow of credit to other key sectors at this critical time.
Obiora also said coordinated and targeted policies were needed to ensure that the opportunities presented by the pandemic are not wasted.

“As aforementioned, this is first and foremost a public health problem and as such, the most immediate priority is clearly to keep people as healthy and safe as possible,” he added.

In his contribution, Deputy Governor, Operations Directorate, Mr. Folashodun Shonubi, said in taking proactive actions to ameliorate the pain of the public health shock on the domestic economy, the central bank must continue to take actions to rein in inflation, especially as it becomes inimical to growth while addressing other impediments to growth.

According to him, the monetary policy rate (MPR) serves more as a reference rate and a tool for signaling, while the cash reserve ratio has proven to be a more effective tool for liquidity management.

He said the loan-to-deposit ratio policy was achieving its credit growth and interest rate reduction targets.
“Clearly, our current activities to support growth is working in the right directions and only requires us to be steadfast, for the full benefit to materialise.

“At this juncture, the fiscal authority is advised to be more pragmatic in its engagement of the issues. As I mentioned in my earlier statements, government is encouraged to explore aggressive expenditure rationalisation, including significant reduction of recurrent expenditure, in the face of persistent revenue shortfall and consider opportunities to use excess liquidity in the banking sector for deficit financing,” he added.