Nigerian economy’s 40% exposure to foreign credit is dangerous- CBN

The Central Bank of Nigeria (CBN) has warned that the 40% exposure of the nation’s economy to foreign credits portend danger.

The apex bank warned that the withdrawal of such funds could cripple Nigeria’s economy and lead to high rate of poverty.

Deputy Director, Financial Policy and Regulation Department, CBN, Hassan Mahmoud, explained that the level of concentration of credits in the hands of foreign partners weakens the economy.

He said, “A drop in the activities of the capital market by the foreign firms would be devastating to the economy as the market is largely dominated by international firms.”

Mahmoud said the volume of foreign portfolio investments in the money market was over $20 billion.

Mahmoud disclosed this during a workshop for business editors and correspondents organised by the Nigeria Deposit Insurance Corporation (NDIC) on Tuesday in Yola, Adamawa State.

In his address, Mahmoud stated that, “Of the total activities in the capital market, 40 per cent of them are from foreign holdings. Even in our money market too, substantial part of the foreign portfolio investments accounts for over $20billion.

“Over 40% of total credits in the economy are in forex. So, anything that happens to the domestic economy will make this huge funds to go out; and when they are about to go out, it will be very devastating for the economy, given our level of external reserve, tools we have to manage exchange rates, and given the sensitivity of that exchange rate market.

“We see in some advanced economies a zero inflation rate. However, for some economies in the Europe area, we see inflation picking up. Even though we are getting out of import dependence, a substantial part of our input or raw materials is still imported. Those hikes in prices are going to feed into our domestic prices.

“Also, a lot of Nigerian corporate bodies, including government have borrowed from the international markets. Our total borrowings now are over $10 billion; so we have huge exposure to international stock markets, and any developments in those markets will impact whatever value of investments and expectations that we have in those economies,” Mahmoud was quoted in a report by The Nation.

Nigeria’s economy still struggling: Nigeria’s economy is still struggling despite the growth it recorded recently. Mahmoud said the country had not recovered strongly after the financial crisis which started about a decade ago.

He said, “The GDP as of today from the National Bureau of Statistics (NBS) is 2.28 per cent. However, if you look at the pre-financial crisis period, it was about 6 to 7 per cent. Since the financial crisis started about a decade ago, we have not even added 200 basis points to our GDP growth. This is of great concern.

“China was doing 10%, and has moved 70 to 8% in less than 10 years. Other emerging economies have surpassed their pre-crisis growth rate.

“However, if we are looking at the minus 1.9 per cent that we did in 2015 and 2016, and the 2.28 per cent growth rate in the third quarter of 2019, you will see that we have moved substantially because it is more difficult to come out of recession than to sustain a positive growth rate.

“It is projected by the CBN that by the fourth quarter of 2019, we are going to be doing 2.38%. The International Monetary Fund (IMF) is projecting close to 2.31%. However, the government is actually projecting 3.1% in the National Planning, given expectations from their Economic Recovery and Growth Plan (ERGP) initiative.”

Poverty level will increase: According to Mahmoud, despite the increase in the contribution of oil sector to the GDP, the number of Nigerians that would fall into poverty would increase due to the failure of the agricultural sector to produce the expected output. He stated this on the basis of the number of Nigerians engaging in agriculture.

“Non-oil contribution to GDP is declining, even as oil sector contributed more to GDP growth. However, the concern is because of the volatility in the oil sector (if it is the driver of our economy), any shortfall from it will significantly distort our projections.

“However, the oil sector is still contributing less than 10 per cent to the GDP. The non-oil sector is still the major contributor to the GDP, which includes agriculture and manufacturing.”

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