Keep CBN Overdrafts within Legal Limits, IMF Tells FG

Keep CBN Overdrafts within Legal Limits, IMF Tells FG
  • Says banking sector remains liquid, well capitalised

By Ndubuisi Francis

The International Monetary Fund (IMF) has advised the federal government to keep reliance on overdrafts from the Central Bank Bank of Nigeria ((CBN) within legal limits.

The Bretton Woods institution said this should be done while the government continues to make efforts to strengthen budget planning and public finance management practices to allow for flexible financing from domestic markets and better integration of cash and debt management.

Section 38(1) of the CBN Act allows the apex bank to grant overdrafts to the federal government to address any temporary deficiency of budget revenue, with sub-section 2 providing that any outstanding overdraft shall not exceed 5 per cent of the previous year’s actual revenue of the federal government.

The IMF’s admonition was contained in a statement from preliminary findings of a virtual visit to Nigeria by its staff.

According to the IMF, real gross domestic product (GDP) is recovering but unemployment and inflation remain elevated, noting that recent exchange rate measures were encouraging.

It, however, called for reforms to achieve a fully unified and market-clearing exchange rate, even as it expressed concern on the re-emergence of fuel subsidies, particularly in the context of low revenue mobilisation.

The IMF team led by Ms. Jesmin Rahman, the statement added, held virtual meetings with the Nigerian authorities between June 1 and 8, 2021 to discuss recent economic, financial developments and outlook.

It said: “The Nigerian economy has started to gradually recover from the negative effects of the COVID-19 global pandemic. Following sharp output contractions in the second and third quarters, GDP growth turned positive in Q4 2020 and growth reached 0.5 per cent (y/y) in Q1 2021, supported by agriculture and services sectors.

“Nevertheless, the employment level continues to fall dramatically and together with other socio-economic indicators, is far below pre-pandemic levels. Inflation slightly decelerated in May but remained elevated at 17.9 per cent, owing to high food price inflation.

“With the recovery in oil prices and remittance flows, the strong pressures on the balance of payments have somewhat abated, although imports are rebounding faster than exports and foreign investor appetite remains subdued resulting in continued FX shortage.

“The incipient recovery in economic activity is projected to take root and broaden among sectors, with GDP growth expected to reach 2.5 per cent in 2021.”

The IMF noted that inflation is expected to remain elevated in 2021, but likely to decelerate in the second half of the year to reach about 15.5 per cent, following the removal of border controls and the elimination of base effects from elevated food price levels.

Tax revenue collections, it observed, are gradually recovering, adding that: “With fuel subsidies resurfacing, additional spending for Covid-19 vaccines, and to address security challenges, the fiscal deficit of the Consolidated Government is expected to remain elevated at 5.5 per cent of GDP,” it said.

The multilateral financial institution stated that downside risks to the near-term arise from further deterioration of security conditions, and the still uncertain course of the COVID-19 pandemic both globally and in Nigeria.

While commending the authorities’ measures to contain the transmission of Covid-19 in Nigeria, including the ongoing vaccination programmes under the COVAX initiative, it strongly expressed support to the authorities’ efforts to acquire additional doses from countries with surplus stocks.

However, it expressed its concern with the resurgence of fuel subsidies, reiterating the importance of introducing market-based fuel pricing mechanism and the need to deploy well-targeted social support to cushion any impact on the poor.

The IMF mission recommended stepping up efforts to strengthen tax administration to mobilise additional revenues and help address priority spending pressures.

It urged the authorities to keep reliance on CBN overdrafts for deficit financing within legal limits, while the government continues to make efforts to strengthen budget planning and public finance management practices to allow for flexible financing from domestic markets and better integration of cash and debt management.

It also described as encouraging the recent removal of the official exchange rate from the CBN website and measures to enhance transparency in the setting of the NAFEX exchange rate.

The IMF called for the sustenance of the momentum towards fully unifying all exchange rate windows and establishing a market-clearing exchange rate.

On monetary policy to strengthen the monetary targeting regime, it recommended integrating the interbank and debt markets and using central bank or government bills of short maturity as the main liquidity management tool, instead of the cash reserve requirements.

According to the IMF, the Nigerian banking sector remains liquid and well-capitalised, while non-performing loans (NPLs) are contained.

But it advised that the extension of the moratorium on principal payments of qualifying credit facilities on a case-by-case basis through March 2022 should be limited to viable debtors with strong pre-crisis fundamentals.

“CBN stress tests purport that the banking system would remain adequately capitalized except in case of a severe deterioration of credit quality.

“Nevertheless, it remains to be seen what share of forborne loans may turn non-performing as the impact of the pandemic abates. Since NPLs often rise at the later part of economic crisis, CBN’s strong oversight remains critical to safeguarding financial sector stability.

“The IMF mission would like to thank the authorities and other counterparts for the open and thoughtful discussions and excellent cooperation,” the statement added.

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