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By Chinwendu Obienyi
The consensus among onshore and offshore analysts is that the Nigerian economy is on its final gasp of ruins, having being battered by local and global headwinds.
It is also subjected to serious financial shocks and capital constraint which impact negatively on macroeconomic variables, and cause the financial intermediation mechanism to suffer.
To resuscitate it and ensure the citizens are no longer ensnared in the vicious circle of poverty, huge funding is required.
In addressing the quagmire, the Central Bank of Nigeria (CBN) has implemented a mix of traditional and unconventional credit-easing policies.
These aim to promote income and employment expansion at both the firm and aggregate levels, build basic infrastructure and engender overall sustainable development.
This meant that capital remains a prerequisite for its economic and social progress as well as for effective public policy making. The Central Bank of Nigeria (CBN) recognizes that for the economy to function efficiently given structural rigidities, and for the private sector to develop and flourish, businesses need to have access to credit.
Hence, after the CBN revealed that credit to the private sector (CPS) increased by 85.2 per cent year-to-year (y/y) to N76.94 trillion in January 2024 as against N41.54 trillion recorded in the January 2023 amid the depreciation of the local currency, many economic analysts noted that the depreciation of the Naira may have incentivized businesses to borrow in the local currency to mitigate risks associated with foreign currency borrowing.
Some notable interventions in recent years by the CBN include the N200 billion Commercial Agriculture Credit Scheme; N200 billion Restructuring and Refinancing Facility; N200 billion SME Credit Guarantee Scheme; and N300 billion Power and Airline Intervention Fund, amongst others.
For instance, the Bank of Industry (BoI) implemented some intervention funds such as the N5 billion BoI/Dangote Matching Fund, Cassava bread Fund, N1.1 billion Cottage Fund, N5 billion FGN Special Intervention Fund for MSME, N800 million National Programme for Food Security, N13.6 billion Rice and Cassava Intervention Fund, Sugar Council Development Fund, National Automotive Council Fund comprising N1billion for Automotive Assembly Plants, N200 million for automotive component manufacturer. Others include, N100 million for automotive garage workshop and N20 million for artisans, craftsmen and mechanics.
Also, the Bank disbursed N8, 479,486.76 under the Cement Fund. Similarly, the Bank of Agriculture disbursed N41 billion to over 600 enterprises across Nigeria in the last ten years, N3 billion on-lending facilities to about twelve states of the Federation and N4 billion to about 30,000 beneficiaries. In addition to these, a total of US$86.56 billion was received as capital inflows into the economy in the form of direct and portfolio investment, trade credits and loans as well as currency and deposits from 2011 to 2015.
Although some of these interventions has been stopped by the Governor, CBN, Olayemi Cardoso, who stated that some of the interventions gulped about N10 trillion. He said that the apex bank is rather open for partnerships.
In truth, given the multiplicity of credit interventions by the CBN and other funding institutions, it is plausible to express some doubt about the absorptive capacity of the economy. The basic problem of interest is that credit purveyance may lead to sub-optimal outcomes and poor resource allocation decisions if local conditions are unfavourable, which may eventually cascade into a huge stock of non-performing credit facilities.
However, the month-on-month basis 23 per cent increase in the CPS in January as against December 2023’s figure of +4.8 per cent, indicate a positive outlook for lending activities in the Nigerian economy, which could support economic growth and investment.
At the same time, the currency in circulation increased by 163.3 per cent y/y to N3.65 trillion (January 2023: N1.39 trillion), mainly attributed to a notable increase in the money in circulation relative to the corresponding period last year, which saw a temporary reduction due to the Naira redesign policy.
Thus, a number of important questions come to mind: Does the growth enhancing attribute of credit depend on the absorptive capacity of the economy? What are the factors constraining the absorptive capacity for further credit in Nigeria? Does the macroeconomic policy framework have any effect on domestic credit absorption? Given the absorptive capacity of the Nigerian economy, what is the threshold point beyond which credit ceases to significantly impact on growth?
Analysts’ view
Head, Research at FSL Securities, Victor Chiazor, noted that while credit can be a potent driver of economic growth, its effectiveness depends on the absorptive capacity of the economy.
“If an economy has a high absorptive capacity, it means that there are ample investment opportunities and productive uses for credit. In such a scenario, increased credit availability can stimulate investment in infrastructure, technology, human capital, and other areas that contribute to economic growth.
Policies and reforms aimed at enhancing absorptive capacity, such as improving infrastructure, strengthening institutions, promoting entrepreneurship, and maintaining macroeconomic stability, can help ensure that credit translates into sustainable and inclusive economic development”, Chiazor explained.
Speaking on the outlook of CPS, analysts at Cordros Research, believe the re-enforcement of the CBN’s limit on the loans-to-deposits (LDR) macro-prudential ratio for deposit money banks (DMBs) and the hike in CRR to 45.0 per cent (previous: 32.0 per cent) will continue to compel commercial banks to generate risky assets over the short to medium term.
“Overall, we project that the CPS will maintain a double-digit expansion in 2024 FY”, they said.
