To sustain recovery, CBN extends interest rate cut on pandemic loans

The Central Bank of Nigeria’s (CBN) extension of the interest rate it reduced during the pandemic (officially known as discounted interest rate) by another 12 months is seen as a big boost for an economy licking its wounds from recession, most analysts polled by BusinessDay said.

Discounted interest rate is a rate charged by the monetary authority, in this case, the CBN on the deposit money banks.

On March 1, 2020, the CBN reduced the interest rates on its intervention funds from 9 percent to 5 percent per annum for one-year period.

The reduction was part of measures to mitigate the negative impact of COVID-19 pandemic on the Nigerian economy. One major impact of the intervention was in the management of Non-Performing Loan (NPL) in the banking system.

Although the banking sector NPLs rose to 6.01 percent at the end of December 2020 from 5.88 percent at the end of November 2020 and above the prudential maximum threshold of 5.0 percent, analysts said it would have been worse than this if not for the discounted facilities and moratorium for banks and other financial institutions.

Akintunde Olusegun, analyst at Polaris Bank Limited, said extending the discounted rate was good for the economy as the COVID-19 pandemic was still on. Most businesses affected have not recovered, and ending it now would not have helped those businesses.

He said the CBN acted in the right direction, noting, “It gives the companies the opportunity to rebound. The impact of the previous discounted rate could be seen on the GDP, which came against the predictions of most economists and the IMF. Surprisingly, Nigeria exited recession.”

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The extension followed the positive impact recorded in the first discounted intervention facility in 2020. Borrowers of the facility were majorly the manufacturers and agribusiness operators.

Data from FBNQuest showed that the Manufacturing Purchasing Managers Index (PMI) made a good recovery from 44.5 to 53.0 in February 2021. The good recovery was driven by medium-sized and small firms.

According to Ayodeji Ebo, head, retail investment, Chapel Hill Denham, it is positive development. It will help the banks in managing NPL. If it is positive, it gives them leeway. The discounted rate for the CBN intervention facility last year provided support to most companies, especially, in the real sector. It helped in the increase in crop production and reduction in cost of fund.

The National Bureau of Statistics (NBS) report showed that agriculture contributed 24.23 percent to nominal GDP in the fourth quarter of 2020, higher than the rates recorded for the fourth quarter of 2019, but lower than the third quarter of 2020, which recorded 23.38 percent and 28.41 percent, respectively. The annual contribution of agriculture to nominal GDP in 2020 was 24.45%. Crop production sector grew by 3.68% in Q4 2020 from 1.38% in Q3 2020 and 2.52% in Q4 2019.

Total disbursements of the CBN’s intervention facilities as at January 2021 amounted to N2 trillion. Specifically, the CBN has disbursed N192.64 billion to 426,016 beneficiaries from the COVID-19 Targeted Credit Facility (TCF) meant for household and small businesses. It has also disbursed N106.96 billion to 27,956 beneficiaries under the Agri-Business Small and Medium Enterprises Investment Scheme (AGSMEIS), while in the Health Care Support Intervention Facility, it has disbursed N72.96 billion to 73 project that comprise 26 pharmaceutical projects and 47 Hospitals and Health Care Services Project in the country, among others.

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Olalekan Aworinde, senior lecturer, department of economics, Pan-Atlantic University, Lagos, explained the discounted interest rate is a rate charged by the monetary authority, in this case, the CBN on the deposit money banks.

The discount rate is used to determine or gauge the time value of money in an economy.

“The CBN extending the discounted interest rate for the purpose of intervention is a right step in the right direction. The implication of this on the economy is more likely to be positive. If the rate reduces, it will also have effect on the lending rate,” he said.

This implies that the lending rate will also reduce and it will make investors as well as entrepreneur have access to loanable fund at a lower interest rate.

Another implication, he said it would have on the economy, is that it will increase the level of investment and thereby reducing the level of employment and later on engender growth.

Frank Onyebu, chairman, Manufacturers Association of Nigeria (MAN), Apapa branch, commended the financial regulator for the extension, adding that the move was timely and quite beneficial to business owners, especially manufacturers.

“Going by the general trend of things in the economy, manufacturers are struggling and this will help in reducing their business burden. Policies like this are what Nigerian manufacturers need to thrive and significantly impact the economy,” Onyebu said.

The production process has been very difficult lately due to the FX shortage and unavailability of raw materials locally, he noted, adding that the inventory of unsold goods has been on the rise due to decline in demand.

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He also said although many manufacturers were beneficiaries of the intervention facility in 2020, however, they will work more on repaying existing loans for now rather than taking new ones.