Written by Sarah NEGEDU

Domestic debt: CBN calls for caution

The Monetary Policy Committee of the Central Bank of Nigeria, CBN, has cautioned the federal government over its rising domestic debt profile and the impact on the cost of borrowing, saying such status could further discourage the private sector.

Rising from its 260th meeting in Abuja, the committee advised the government to strongly exercise restraint on domestic borrowing in order to lower the cost of credit to the private sector.

Briefing journalists on the outcome of the MPC meeting in Abuja, the Governor of the Central Bank of Nigeria, Mr. Godwin Emefiele, said the committee tasked the government to pay the over N2.7trn domestic debts owed contractors so they could meet their debts obligations to the banks to drive down the banks’ none performing loans.

“The committee also noted that as government pays off its huge contractor debts, a sizeable portion of these non-performing loans will be addressed,” adding that “As the fiscal sector continues to settle its outstanding liabilities, it reduces its domestic debt profile, thus increasing the liquidity of the banking system.”

On the level of DMBs’ credit to the economy, the Committee also noted that the continued low level of lending by banks  remains  a  constraint  to  growth  of  the  real sector  of  the economy. They therefore advised the Management of the CBN to continue to provide the required policy impetus to engender improved credit delivery by the deposit money banks to the economy.

The MPC also frowned at the increase in allocations to the three tiers of government, following the increase in oil revenue, stressing that the country needs a robust saving for the rainy day to wade-off shocks from falling oil prices in the future.

Emefiele said, the “MPC observed increasing monetization of oil proceeds as evident in the growing Federation Accounts Committee, FAAC, distribution, relative to the 2017 level of disbursements. The Committee urged the Government to initiate strong stabilization programmes and to freeze the growth in its aggregate expenditure and FAAC distributions in order to create savings; needed to stabilize the economy against future oil price related shocks.”

All members of the committee voted to retain all key rates so as to consolidate on the gains already recorded in the economy as changing positions may erode all that has been achieved in the past one year.

“On the argument to hold, the Committee believes that key macroeconomic variables have continued to evolve in a positive direction in line with the current stance of macroeconomic policy and should be allowed more time to fully manifest” he said adding that the committee thus voted to retain the MPR at 14.0 per cent; CRR at 22.5 per cent; liquidity ratio at 30.0 per cent; and asymmetric corridor at +200 and -500 basis points around the MPR.

On the outlook, the CBN boss said, “Forecasts of key macroeconomic indicators give a positive outlook for the Nigerian economy in 2018. This is predicated on the quick passage and effective implementation of the 2018 budget, improved security, foreign exchange market stability as well as favourable crude oil prices.

However on the downside, the Committee noted that “the potential impact of the 2019 election related spending, against the weak backdrop of tax revenue efforts, herdsmen related violence and rising yields in the advanced economies. Indications in the US and the UK point to higher interest rates in the short to medium term.”

Nigeria’s external reserve is now at $46.699billion as at March 29, 2018. The MPC however urged the CBN not to relent in building buffers against future price downturns.

 

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