Barely two years ago, the Central Bank of Nigeria (CBN) had at the peak of rising inflation, embarked on a cycle of tightening with Monetary Policy Rate (MPR)-the benchmark interest rate hiked in July 2016 from 12 per cent to the 14 per cent.
The situation has since taken a turn for the better, as the National Bureau of Statistics (NBS) was recently quoted as saying the Consumer Price Index (CPI), which measured inflation for July dropped to 11.14 per cent (year-on-year) from 11. 23 per cent recorded in June.
According to the bureau, the figure showed 18 consecutive reductions in inflation rate since January 2017.
With this successive drop inflation came the growing expectation for a drop in rate by the apex bank.
At the annual dinner of the Chattered institute of bankers of Nigeria in 2017, the CBN governor, Godwin Emefiele responded to this yernings in his remarks when he said: “If the pace of disinflation becomes adequate and we see inflation at predicted levels, I am very optimistic that Monetary
Policy Committee (MPC) may begin to see strong justification for an easing of monetary policy, which may further accelerate the recovery process,” This singular statement came as a relieve to the organized private sector (OPS) and rightly so because Globally, the private sector is critical to
economic growth and poverty reduction in any economy. It is the engine of growth for any economy as successful businesses create jobs and pay the taxes which in turn enables governments to carry out its developmental role.
The News was even more cheering because lately in Nigeria, the flow of banking sector credit to this critical segment of the economy has continued to dwindle.
In fact, figures from the Central Bank of Nigeria (CBN) showed that credit to the private sector fell in May 2018, to N22.207 trillion year-on-year as against the N22.254 trillion it was in April.
The CBN report had shown that industry gross credit recorded a 3.63 per cent decrease in April 2018, the lowest since January 2017.
However, things took a different turn globally with the increase of rate by the federal bank of the United State of America and that meant amongst other factors meant that capital will take a flight from emerging economies.
Faced with the need to continue to attract capital into the economy to support the reserves and the stability of Naira on the one hand and the need to stimulate growth on the other hand, the Apex bank has result in deploying unconventional tools to achieve its objective on all front.
Emefiele at the end of the last Monetary policy meeting said it has considered a new approach, which would be tied to the Cash Reserve Ratio (CRR) mechanism.
He said: “The first approach, where we said, in order to achieve the objective of lowering interest rate particularly to those priority sectors–manufacturing sector, agric sector– that we will encourage large corporates to issue commercial papers (CPs) to the market and there will be a memorandum that will detail explanations of what they are going to do with that money.
“In order to complement the effort of the banks, we will expect that these CPs will come at low rate at single-digit of nine per cent or below that, and for long tenor at a period of seven years with a specific purpose for that loan.
“If the central bank sees those kinds of notes in the market, we will complement the effort of the banks through a mechanism to support that bank that lends to that corporate at single digit rate.
“It is not meant to bring competition in the money deposit banks; it is meant to complement their efforts. The most important thing is that we want to see to it that we achieve a single digit rate.”
The second approach, he disclosed, works in such a way that any bank that lends money for new projects and planned expansion that are verifiable (not refinancing), for seven years (inclusive of two years moratorium) at nine per cent interest rate, would compel the CBN to go into that bank’s CRR and release equivalent of that financing from its CRR at zero kobo spread.
Emefiele said: “We feel this is novel; it is something that we should give a chance. In the past, we had reduced CRR and released liquidity into the market, but the liquidity was not channelled properly to the high impact corporations – we mean employment-generating sectors or output-improving
sectors of the economy.
“So, we decided we should approach it through this note. We believe this will work because rather than the banks keeping the money in the reserves, they can key into this and promote these transactions as long as they meet the terms and conditions.”
In keeping with that promise, the CBN last week released the guideline for the increase flow of credit to the real sector of the economy.
the Bank’s acting Director of Corporate Communications, Mr. Isaac Okorafor, said the Bank had put in place a programme under the Differentiated Cash Reserves Requirement (DCRR) Regime whereby DMBs interested in providing Credit Financing to greenfield (new) and brownfield (expansion) projects in the real sector (Agriculture and Manufacturing) could request for the release of funds from their CRR to finance the projects; subject to DMBs providing verifiable evidence that the funds shall be directed at the approved projects by the CBN.
Making further clarifications, he said that the tenor for the Differentiated CRR would be a minimum of seven years with a two-year moratorium. For the Corporate Bonds (CBs) Programme, he said the tenor and the moratorium would be specified in the prospectus by the issuing
corporate. He added that the maximum facility shall be N10 billion per project and facilities are to be administered at an all-in Interest rate/charge of 9 per cent per annum.
CPs are unsecured promissory notes with a fixed maturity of less than one year, issued by companies to raise money to meet short term finance obligations. The notes are backed by the promise of the issuers to repay based on certain agreed terms.
Since 2017, several companies which included Rand Merchant Bank, FSDH Merchant Bank and recently, Dangote Cement and Stanbic IBTC, have issued commercial paper.
According to analysts, as a result of the banks’ reluctance to lend, CPs have become an increasingly attractive source of funding for corporates with short-term obligations to meet.
CP issuance isn’t for everyone, but corporates with the right credentials could do worse than to sell short-dated paper, a report by Treasury Today stated.
Also, analysts at Afrinvest Securities Limited, noted that the decision to encourage large corporates to issue commercial papers which the central bank would buy, “is a form of Quantitative Easing (QE) in advanced markets, a last-ditch effort to boost growth after the 2009 global recession which
recorded mixed impact.”
Afrinvest added, “We believe this is an unlikely avenue for growth in Nigeria, given a largely informal economy which would not benefit directly from the proposed stimulus, probably targeted at large corporates (prime borrowers), and multiple structural factors that currently inhibit credit transmission. “
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