Low Forex Earnings May Impair CBN’s Ability To Defend Naira – Ozoemene

– Urges Banks To Provide More Fund To Nigerians

The Managing Director/Chief Executive Officer, Lyceum Alliance Limited, Dr Jekwu Ozoemene has said that the twin shocks of the Covid-19 pandemic and the oil price wars may result in low foreign exchange earnings that would affect the ability of the Central Bank of Nigeria to defend the Naira.

He said currently the twin crisis had resulted in weaker macroeconomic
indicators; increased inflation and currency depreciation.

This, he noted, had significantly increase the banking industry’s foreign currency loan book, particularly loans in the oil and gas and import dependent sectors.

He said the development, if left unchecked, could lead to a deterioration of the capitalisation ratios of banks.

Ozoemene said these in a paper he presented on Saturday at the Chartered Institute of Bankers of Nigeria, Rivers
State Chapter’s Webinar on “Opportunities and Challenges for the Banking Industry During and Post the COVID-19 Era.”

In his presentation which was made available to THE WHISTLER, he said while banks have received approval from the CBN to restructure about 33 per cent of their loan book, this debt relief could potentially affect the Non-Performing Loan portfolios in the banking industry.

The apex bank had on Monday said it had received requests from 22 banks to restructure 35,640 loans worth N7.8trn.

But Ozoemene argued that under International Financial Reporting Standards 9 model, an expected credit loss would still arise even where full recovery is expected on a loan, if payment is delayed and interest does not accrue during the deferral period at the effective
interest rate of the loan.

This, he said, was because there is a loss in terms of the present value of the cash flows.

He said, “We potentially face another banking industry crisis in Nigeria due to the twin shocks of the COVID-19 pandemic and the earlier oil price wars.

“There is no doubt that Nigeria is headed into another recession. According to the World Bank, this might be the worst recession that the country has experienced in the last four decades.

“Government is projecting that receipts from crude oil sale will crash by as much as 80 per cent

“The implication is dire as crude oil revenues make up over 90 per cent of Nigeria’s foreign exchange earnings and more than 60 per cent of government revenues.

“Being the largest spender, a decline in government’s revenue will affect key sectors such as oil and gas, power, construction, manufacturing, real estate and general commerce.

“With this, we expect a deterioration in the quality of loans extended to aforementioned sectors. We also expect significant pressure on the exchange rate and the ability of banks to source FX for their
clients.

“Low FX earnings could impair the CBN’s ability to defend the Naira resulting in weaker macroeconomic indicators; increased inflation and currency depreciation.”

He called on the banking sector to provide more funds to key sectors of the economy, adding that this would help to reset the economy to the path of sustainable growth and development.

He said the CIBN has a major role to play in industry research and capacity development particularly in developing
trainings for the local abnormalities in lending to the target economic sectors.

He said, “I think it has become clear that the reason why local commercial banks are not lending to some sectors is not just about unavailability of longer term funding but more of risk underwriting capacity.

“So far, most, if not all the solutions put forward are all targeted at providing long tenured funding and liquidity without addressing risk enhancement and underwriting.

“The real danger is that 18 to 24 months down the line, we will potentially face an explosion in NPLs in the very sectors that we are trying to drive funding to. Agriculture has already witnessed a 41.93 per cent uptick.

“Nobody knows for sure how this crisis is going to play out so my recommendation is for banks to support vulnerable customers, and provide them with a credit lifeline where necessary.

“Helping customers carve a path forward creates opportunities for banks to build trust with the customers and be part of resetting and reasserting their role in this Big reset.”