The World Bank has said the Central Bank of Nigeria’s development finance intervention is fuelling inflation in the short term and weakening the ability of the apex bank to control inflation.
According to the global bank, the CBN’s continued provision of subsidised funding to certain sectors has to slow down as it is undermining the ability of commercial banks to lend on a risk-adjusted pricing basis. It added that the apex bank’s disbursement in the private sector as its share of private sector credit rose from 6.5 per cent in 2019 to 10 per cent in 2021.
It disclosed this in its ‘Nigeria Development Update (June 2022): The Continuing Urgency of Business Unusual.’ It said, “The CBN’s continued provision of heavily subsidised funding to certain sectors undermines commercial banks that lend on a risk-adjusted pricing basis and needs to be dialled down.
“CBN disbursements are growing in funding the private sector, with the CBN’s share of private sector credit rising from about 6.5 per cent at end-2019 to 10 per cent by end-2021. Although some of the COVID-related tools deployed by the CBN are being phased out (e.g., the moratorium on principal repayments on CBN-funded credits lapsed in March 2022), the Central Bank has introduced new intervention facilities without a publicly available evaluation of their impact.
“The CBN also stepped up disbursements and kept the monetary policy rate unchanged at 11.5 percent from September 2020 until May 2022. On March 15, 2022, the CBN extended the five percent per annum interest rate on its development finance intervention funds for one more year through end-February 2023.
“The Monetary Policy Committee has strongly encouraged the central bank to continue its development finance interventions, including a policy tool to help tame rising inflation. However, this stance fuels inflation in the short term from elevated aggregate demand and weakens the ability of the central bank to control inflation efficiently.”
According to the Washington-based bank, expanding government programmes to support micro, small, and medium enterprises is a priority to protect viable and vulnerable MSMEs against rising uncertainty.
It said while the banking system had proved resilient in the face of the pandemic, the operating environment for banks and firms has become more challenging recently. It stated that the fallout from the war in Ukraine is driving inflation higher, increasing production costs and the cost of borrowing through higher rates.
It further said that loan quality over the next several quarters is likely to deteriorate. It added that certain medium-sized banks that cater to SMEs and intermediate CBN development finance could be stressed if economic recovery falters and SMEs, many of which have already suffered over the last two years, typically have less resiliency in revenue generation than larger, more diversified companies.