The days of cheap – almost free money- flowing into certain sectors of the Nigerian economy via the interventions of the Central Bank of Nigeria (CBN) seem to be over as the apex institution signals an end to low-interest funds.
In a move to actualise this, the CBN on Wednesday announced that the interest rate on intervention funds provided to some sectors would be pegged at 9 per cent, from 5% previously charged.
This is as the World Bank called for a reduction in such preferential funding arrangements.
In a circulater dated August 17, 2022, the Central Bank referred to an announcement it made on March 15 this year, in which it extended the period of interest rate reduction on all intervention facilities from 9% to 5% per annum, as part of measures to mitigate the negative impact of COVID-19 pandemic on the Nigerian economy. It, however, announced the reversal of the interest rate on all its intervention facilities to 9% per annum.
All intervention facilities granted effective July 20, 2020 would be at 9 per cent per annum, while all existing intervention facilities granted prior to July 20, 2020, would be at 9% with effect from September 1, 2020, the bank said.
Since 2014, when Governor Godwin Emefiele came into office, the CBN has vigorously pursued what it terms Development Finance, the philosophy of which is to give funds at highly subsidised interest rates to certain sectors of the economy as a means of spurring growth in them to drive the rest of the economy. Beneficiary sectors so far have included agriculture, power and energy.
The World Bank, in its report, Nigerian Development Update (June), noted that the Central Bank needs to reduce intervention funds in certain sectors, saying they distort market pricing of loans and damaging to the growth of commercial banks.
“The CBN’s continued provision of heavily subsidised funding to certain sectors undermines commercial banks that lend on a risk-adjusted pricing basis and needs to be dialled down,” the World Bank noted in its report, titled “The Continuing Urgency of Business as Usual”.
It noted that CBN disbursements were growing in funding the private sector, with the CBN’s share of private sector credit rising from about 6.5% in 2019 to 10% in 2021
The CBN also stepped up disbursements and kept the monetary policy rate unchanged at 11.5% from September 2020 until May 2022.
The CBN reduced the interest rates on all intervention facilities from 9% to 5% per annum for one year from March 1, 2020, as part of measures to mitigate the negative impact of the COVID-19 pandemic on the Nigerian economy. The bank had decided that all credit facilities that were accessed through the participating banks and other financial institutions were also granted a one-year moratorium on all principal payments with effect from March 1, 2020.
However, in a circular dated March 3, 2021, it granted another one-year extension to February 28, 2022, of the discounted interest rate for its intervention facilities, while promising that the roll-over of the moratorium on the above facilities would be considered on a case-by-case basis.
The World Bank also noted that the Monetary Policy Committee has strongly encouraged the central bank to continue its development finance interventions, including a policy tool to help tame rising inflation.
It warned, however, that “This stance fuels inflation in the short term from elevated aggregate demand and weakens the ability of the central bank to control inflation efficiently”. Nigeria’s headline inflation rose to 19.64% in July, from 17.71% in June.
The bank recommended an expansion of government programmes to support Micro, Small, and Medium Enterprises (MSMEs) as a priority to protect viable and vulnerable MSMEs against rising uncertainty.