Finance

How FX scarcity, Naira redesign, others shaped economic discourse in 2022

After the COVID-19 pandemic and the global recession that followed, the Nigerian economy and its banking industry are still grappling with several macroeconomic challenges like weak business environment, limiting opportunities for growth, inflation, and regulatory policies.

Much of these issues were largely thrown up by the Russian invasion of Ukraine in February 2022 which muted output growth in Nigeria and several other countries.

The tension between these two countries brought about soaring inflation, threat of recession, low energy and food supplies as well as oil price instability.

Nevertheless, commercial banks across the country continued to record stable financial performances, as seen in the strong results reported in the 9 months of 2022. For perspective, banks listed on the Nigerian Exchange Limited (NGX) reported a gross earnings growth of 34.6 per cent year-on-year (y/y) to N4.13 trillion, with most of them recording profit growth.

However, there were quite a number of factors that shaped the economy and the banking sector in the year under review, including FX scarcity, Naira redesign, Inflation, GDP growth, Food supply, flooding, Business Diversification, borrowings, RT200 FX programme, monetary policies among others.

There is no gainsaying it that FX scarcity took centre stage of corporate planning during the period as investors, businesses and even banks grappled with this predicament in 2022. This resulted in the Naira depreciation, illiquidity in the FX market especially at the official window, volatility in the market as well as large disparity in the exchange rate. The Nigerian FX market closed for the year 2022, (last week Friday), with Naira losing 23.65 per cent (year-on-year) against the dollar at the parallel market, popularly known as the black market.

Faced with limited supply of FX, manufacturers, investors and individuals resorted to the parallel market to purchase foreign currency. This then resulted in the market ending the year with the dollar selling at the rate of N740 as against N565 at the beginning of 2022. However at the Investors and Exporters (I&E) forex window, Nigeria’s official FX market, the Naira ended the year 2022 with 8.56 per cent (year-on-year) depreciation against the dollar.

On the other hand, Nigeria’s FX reserves recorded another accretion, increasing by $122.40 million week-on-week (w/w) to $37.09 billion (As at 29 December 2022) as against January 2022 opening value of $40.04 billion. This decline according to analysts was due to lower oil prices, sub-optimal oil production and the Central Bank of Nigeria (CBN)’s effort to support the Naira.

Naira redesign

Another factor that shaped the economy as well as the banking sector was the redesigning of the nation’s currency. The redesigned currency (N1000, N500 and N200) were earlier meant to be unveiled in December 2022 but President Muhammadu Buhari opted to unveil it in November 2022, stating that it will help the country address the issue of illicit financial flows, corruption, improve the economy and the value of the Nigerian currency.

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For his part, the CBN Governor, Godwin Emefiele, said the introduction of new notes was a deliberate step by the government to checkmate corruption and counterfeiting of the notes.

Emefiele also added that the naira notes currently in use will remain as legal tender till 31st January, 2023 while stating that this is the first time in almost 20 years that Nigeria will redesign its currency.

The apex bank also revealed in December 2022, that cash outside commercial banks now consists of over 80 per cent of the currency in circulation in contrast to the 85 per cent earlier revealed in November 2022. However, Automated Teller Machines (ATMs) across the country are yet to commence dispensing the new notes.

Inflation

As at January 2022, headline inflation stood at 15.6 per cent and hit 21.40 per cent in November 2022 – the worst in recent history. Food inflation on the other hand, outpaced headline inflation and core inflation, accelerating between 50 per cent and 100 per cent in the year under review. Also, reports from the World Bank revealed that 5 million Nigerians were pushed into poverty amid a slump of purchasing power largely due to the galloping inflation.

GDP growth

Despite the enormity of shocks from the fiscal, monetary policies and macroeconomic headwinds, the Nigerian economy demonstrated resilience. The country’s GDP is valued at over N200 trillion according to the third quarter of 2022 report from the National Bureau of Statistics (NBS). For the first quarter of 2022, growth stood at 3.11 per cent, for Q2 2022, grew by 3.54 per cent but fell by 2.25 per cent in Q3 2022.

Monetary policies

The Monetary Policy Committee of the Central Bank of Nigeria (CBN) shifted away from its accommodative policy stance, switching to a hawkish monetary policy stance from its May policy meeting. The Committee continuously raised the MPR at its next three meetings – 100bps in July, 150bps in September, and 100bps in November taking the 2022 FY cumulative rate hikes to 500bps and bringing the MPR to 16.5 per cent, the highest level since 2001.

The MPC also expressed confidence that the worsening inflation affecting the macro-economy and consumers’ purchasing power will eventually be tamed.

“During the meeting, the MPC noted that the tightening will help restore investors’ confidence whilst curbing higher rate of inflation. In summary, the MPC voted to increase MPR by 100 basis points to 16.5 per cent, the asymmetric corridor of +100/-700 basis points around the MPR was retained, CRR was retained at 32.5 per cent while the liquidity ratio was also kept at 30 per cent”, Emefiele revealed.

RT200 FX programme

To support the fundamentals of the Nigerian economy, diversify from dependence on oil inflows, and minimize the debilitating pressures in the foreign exchange market, the CBN launched the RT200 programme in February 2022.

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Nine months after its inception, Emefiele noted that non-oil exporters have repatriated a total of $4.99 billion. He also noted at the last bankers committee retreat in December 2022 that tremendous progress has been made in generating non-oil export revenues in 2022 as approximately $62 million have been repatriated in Q1 2022, $622 million in Q2 2022, and $850 million in Q3 2022.

“Let us not forget that rebates are only meant for processed goods and so by the time we add processed and unprocessed crude, cocoa, cashew, we actually ran into almost $1 billion during Q3 2022. We are happy at the progress that has been made so far with or without some little support to the exporters. We are happy that we are seeing the repatriation that has resulted in almost $2 billion coming in this year,” he said. 

To further stimulate export financing and also encourage export of goods out of the country, the CBN ordered that every Deposit Money Banks (DMBs) must grant at least a minimum of N500 billion in loans to export oriented companies.

Business diversification

Banks started to explore different sustainable long-term development opportunities in light of the curtailed growth prospects of traditional income streams. In 2022, banks such as GTCO and AccessCorp, successfully transitioned to holding company (Holdco) structures, allowing for the diversification of earnings streams. This move was the primary driver of recent acquisitions within the sector, which has seen banks acquire asset management and pension businesses in recent times – AccessCorp acquired First Guarantee Pension Ltd, and FBN Holdings acquired Access Pension Fund Custodian Limited.

FG’s borrowings

The Federal Government has relied heavily on the CBN’s Ways and Means borrowings to plug shortfalls in the deficit since 2020, resulting in the balance growing exponentially during this period. Similarly, despite persistent claims of the cessation of use, and potential securitisation of the balance, the balance was further utilised in 2022. As of eight months of 2022, the balance grew by 26.4 per cent to N22.07 trillion (2021FY: N17.46 trillion). Consequently, as mentioned  earlier, the magnitude of borrowings that should have been recorded in 2022 has not been recorded.

Stakeholders’ react

Reacting to the performance of the banking industry, the Chief Executive Officer, Center for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, said the sector for the terms of their support to the economy is still very weak because a lot of SMEs are still complaining about access to credit and the cost of credit is still also high (close to 30 per cent).

Yusuf noted that the domestic credit to the private sector as a percentage of GDP in Nigeria is just about 15 per cent or even less as compared to other countries who have about 70 per cent and 100 per cent in some advanced economies.

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According to him, the connection between the banking system and the economy based on that parameter is still extremely low and one of the lowest globally.

“The CBN policy of the Cash Reserve Ratio (CRR) is also affecting the capacity of the banks to be able to perform their financial intermediation (which means mobilizing resources from the surplus end of the economy to the deficit end of the economy). But if you have a situation where the Central Bank through its Monetary Policy particularly in the area of CRR is 32.5 per cent, this is very high. So the money that the banks are supposed to be lending have been sterilized by the CBN. In other words, if a bank has N100 million deposit, N32.5 million has to go to the CBN and so the bank can only do business with just over 60 per cent of the deposit and it is based on deposits that these banks can give loans. So the CBN policy particularly the CRR is a major impediment to the capacity of the banks to lend and support the economy. Another issue is FX but the FX is not the issue of the banks but is down to the CBN and so the FX market has been a challenging one for businesses as a lot of them have been complaining about the quality of policies and the corruption in the FX market”, the CPPE boss said.

Corroborating him, the Chief Executive Officer, APT Securities, Kurfi Garba, said that in terms of market performance, the banking sector performed below expectations.

He however disagreed with Yusuf, stating that the CBN policies for 2022 were working in favour of the banks.

“In 2021, the banks, treasury bills and other returns were in single digit. Today, MPR is 16.5 per cent, the highest in the history of the Monetary Policy and so it showed that moving the MPR to 16.5 per cent showed that all other indices and returns will be in double digits and what it means is that it will be good for our banks because the banks were not lending. So since they were not lending, they will be prepared to place their money in the bond, place it with the CBN and with 16.5 per cent, it shows that the banks are likely to do well.

With the redesign of the Naira, banks will likely do well in 2023. The same applies to electronic transfer as the CBN confirmed that in the month of September, over N33 trillion was done electronically and therefore this would mean we expect the bank to do well. If you also look at it, most of the CBN policies came in the second half of the year and this pushed the sector a bit slightly,” Garba said.

Sunnews

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