The International Monetary Fund has advised the Central Bank of Nigeria to scale back its credit intervention programmes as they are likely to cause market distortions in the long run.
The Washington-based lender said the CBN’s credit intervention schemes were a response to the disruptions caused by the COVID-19 pandemic.
It disclosed this in its report titled, ‘Nigeria Staff Report for the 2021 Article IV Consultation.’
It said, “As the recovery firms up, the CBN also needs to scale back its credit intervention programmes, which were ramped up as part of the COVID-19 crisis response.
“The CBN’s credit injection to the private sector, both direct lending and on-lending through banks, accounts for about 45 per cent of credit growth since 2020—significantly above the average of 12 per cent in pre-pandemic years. As banks exercised restraints in lending, the CBN interventions have provided financing to the underserved markets (e.g., agriculture) and mitigated the impact of the pandemic.
“However, they cannot be expanded indefinitely given likely efficiency costs and market distortions and its thorough review will be warranted.”
The IMF added that while CBN’s internal and external audit mechanisms generally adhere to international standards, its Act needs to be modernised to strengthen its autonomy, governance, and to establish price stability as its primary objective.
It said, “The CBN’s involvement in quasi-fiscal operations and developmental lending activities should be phased out, and financial reporting practices bolstered through full adoption of International Financial Reporting Standards and resumed publication of annual financial statements.”
However, Nigerian authorities believe the CBN’s multi-faceted role is justified since it is shepherding a frail recovery.
They said the intervention programmes were targeted at sectors capable of helping job creation.
According to them, it is impossible for the CBN to phase out these programmes until the COVID-19 pandemic is over.
They said, “The authorities believe that the need for shepherding a frail recovery amidst very limited fiscal space justifies the CBN’s multi-faceted role. Unconventional policy instruments, notably the CRR, have been vital in controlling excess liquidity, while selectively allowing its use for providing credit to priority sectors.
“The intervention programs have been targeted to sectors with a large empirical elasticity vis-à-vis job creation. The authorities also did not view Nigeria’s inflation as a monetary phenomenon, particularly in the short run—stressing the importance of structural factors—including credit gaps—as a critical driver of supply-side inflation.
“While agreeing with the need to shift away from intrusive measures, such as discretionary Cash Reserve Ratio, in the medium term, they view that the uncertain pandemic outlook and frictions around monetary transmission mechanism do not warrant an immediate abandoning of this tool which has proved to be quite potent.
“Likewise, the envisaged phasing out of quasi-fiscal activities can only be resumed once the crisis is over.”