Inflation: Bank credit to private sector, government drops by N23.99trn in March

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Nigeria’s banks’ credit to the private sector and the government has seen a significant drop of N23.99 trillion from February to March 2024, underlining the Central Bank of Nigeria’s aggressive stance to curbing inflation and stabilising the economy.

The private credit and monetary statistics data from the CBN indicated a N9.65 trillion or 11.9 per cent month-on-month dip in credit allocation to the private sector, with the figures dropping from N80.86 trillion in February to N71.21 trillion in March 2024.

Credit to the private sector in 2023 rose to N62.52 trillion, a growth of 50.49 per cent or N20.98 trillion from N41.54 trillion reported by the CBN in January 2023.

According to analysts, the reported N80.86 trillion credit to the private sector in February 2024 is on the backdrop of the weakening of the naira at the foreign exchange market and 33.2 per cent inflation rate, stressing that bank customers were lending to big corporations to meet the 65 per cent Loan-to-Deposit Ratio threshold of the CBN.

Nigeria’s annual inflation rate soared to a fresh 1996-high of 33.2 per cent in March 2024, up from 29.9 per cent in January 2024, mainly due to the effects of oil subsidy removal and devaluation of the naira.

Between June 2023, when the foreign exchange market was liberalized, and mid-February 2024, the naira depreciated by 69per cent, leading to a considerable rise in import costs and significantly impacting Nigeria’s import-dependent economy.

The CBN in the policy to improve lending to customers to stimulate the real sector of the economy, has updated its Cash Reserve Requirement mechanism, making banks with minimum LDR below requirement face a 50 per cent lending shortfall.

This implies that for every N100 received as deposits, the banks are to lend N65 to customers in a policy that the apex bank had in a circular to banks, stating that it would resume the enforcement of the LDR policy effective July 31, 2023.

Also, CRR is one of the monetary policy tools the CBN uses to limit the circulation of money or supply in the economy, as banks’ liquidity drops. In the last monetary policy committee meeting of the CBN in July 2023, the CRR was retained at 32.5 per cent.

However, the Acting Director of the Banking Supervision Department, Adetona Adedeji in a circular to all Deposit Money Bank said, the apex bank is ceasing its daily CRR debits and will be adopting an updated CRR mechanism that is intended to facilitate bank capacity for planning, monitoring and aligning with records with the CBN.

Also, banks lending to the government dropped by N14.34 trillion or 42.3 per cent in March 2024 to N19.59 trillion from N33.93 trillion in February 2024. This significant reduction follows a period of robust growth, where credit to the private sector had escalated by 66per cent compared to the same period in 2023.

According to CBN, January 2024 started on a high note as credit reached N76.29 trillion, significantly up from N41.54 trillion in January 2023. This upward trend continued into February when it peaked at N80.86 trillion.

This decline marks a significant shift from the previous year, reflecting a 29per cent decrease compared to the year 2023.

January 2024 saw government credit at N36.18 trillion, up from N26.64 trillion in January 2023, showing an initial increase. However, subsequent months witnessed variable reductions, culminating in the substantial drop observed in March.

Analysts have expressed that the cost of production, coupled with the scarcity of foreign exchange, played a significant role in banks’ credit to the private sector.

The CEO of the Centre for the Promotion of Private Enterprise, Muda Yusuf attributed the decline to macroeconomy challenges.

“With the present challenges in the foreign exchange market, cost of production, and high energy cost, investors will not want to take credit from banks. Banks can only finance projects that are doing well. If any project is having challenges, it will affect the demand for credit.

“The decline in credit to the private sector is because of the challenges in the economy. The present challenges are affecting a lot of business and you do not expect them to take money from the banks.”

He explained that interest rates in the banking sector have also witnessed an increase amid the 18.75 per cent Monetary Policy Rate.

According to Yusuf, “MPR has remained at 24.75 per cent but the rate of lending has increased significantly in the banking sector. For SMEs today, the interest rate is over 25 per cent. Some banks’ interest rate is over 30 per cent. If the interest rate is high, people will be reluctant to borrow money from banks.”

On the decline in lending to the government, he expressed that President Bola Tinubu’s administration is focusing on borrowing less from the banks.

“Because of the inflationary effect of borrowing from the banks, there is a deliberate policy by this present administration to reduce government exposure to bank’s credit,” he added.