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Nigerian banks are growing their loan books to government, mainly the Federal Government, to new levels, even as their lending to the private sector shrinks.
Figures from the Central Bank of Nigeria (CBN) show that while credit to the private sector shrank for the second successive month this year, in April, credit to government rose at its fastest pace in 16 years.
Net credit to government is up 25 percent since the beginning of the year, or at an annualised rate of 72 percent to N5.59 trillion, while credit to the private sector declined 3.11 percent to N21.9 trillion, as banks opt for high returning, risk-free government securities, to weather the storm of rising bad debt.
Credit to the private sector had shrunk 2 percent to N22.7 trillion in March, from N22.7 trillion in February.
Rising bank credit to government at the detriment of credit to the private sector, could undermine economic growth and job creation for a country amid its second year of recession, according to Muda Yusuf, director-general of the Lagos Chamber of Commerce and Industry (LCCI).
“The bulk of the resources in the economy is now being channelled to the purchase of government debt instruments at attractive rates of between 18 and 22 percent, rather than to businesses in the economy,” Yusuf observed.
“This has also pushed up interest rates to the 30 percent threshold for private investors and will surely not help stimulate domestic investment ,which is most critical to job creation.”
Nigeria’s credit to the private sector, as a percentage of GDP, is one of the lowest in the world, at 14.2 percent and compares poorly with the sub-Saharan Africa average of 45 percent. It is 96.5 percent and 146 percent in middle and high income countries respectively, according to World Bank data.
Credit to the private sector, a measure of economic development, has come under more pressure in the last one year, as high returns on sovereign bonds lure commercial banks to lend to government and shave their appetite for private sector lending.
Buoyed by investment in government securities, the interest income of 13 banks tracked by BusinessDay, came in at N713 billion in the first three months of 2017, a 26 percent increase from N528 billion in the first quarter of 2016.
The yield on one-year Treasury bills, 18 percent, is at its highest since February 2012, while long term bonds, yielding 16 percent, are at a 2-year high. Nigeria is second only to Egypt as the most attractive of developing markets tracked by Bloomberg.
Monetary authorities have upped benchmark-lending rates to a record 14 percent in a bid to give investors real returns on investment, amid an inflation rate of 17.2 percent.
This makes the country’s interest rate the second highest in sub-Saharan Africa, trailing Angola’s 16 percent by 200 basis points and 700 basis points higher than South-Africa’s 7 percent, according to data compiled by BusinessDay.
While investors have benefited from the high yields, it has put a strain on government revenues already reeling from low oil receipts.
The International Monetary Fund (IMF) in its Article 4 Consultation Report, indicated that 66 percent of government revenue was used in interest payment last year. Analysts say this is disproportionate and poses a risk to the macro-economy.
“There’s a need to come up with a strategic way to reduce interest rates for both the government and the private sector,” said Bismarck Rewane, CEO of advisory firm, Financial Derivatives Company (FDC).
“It is difficult for businesses to make profit when interest rates are as high as 30 percent,” Rewane said. “You can’t fight an economic recession without allowing interest rates ease,” in order to stimulate credit flow.
The Monetary Policy Committee (MPC) left benchmark interest rate unchanged at 14 percent for the fifth consecutive time in May, after the CBN cited the risk of stoking inflation with a reduction in interest rates.
“If rates come down, output increases, while prices are depressed, so it may not even stoke inflation,” Rewane added in an interview on local radio station, Classic Fm.
In 2016, the Nigerian economy fell into its first recession in 25 years after low oil revenues slashed government revenue and fuel and power shortages crimped business activity. The IMF projects growth of 0.8 percent this year, while the government targets 2.5 percent.
LOLADE AKINMURELE
