CBN urges vigilance to mitigate banking sector credit risks
The Central Bank of Nigeria (CBN) has said the anticipated economic damage due to the COVID-19 pandemic requires vigilance to mitigate emerging risks in the banking system.
Aisha Ahmad, the deputy governor, financial system stability directorate, CBN, said this in her personal statement at the last Monetary Policy Committee (MPC) meeting, a copy of which was posted on the bank’s website yesterday.
According to her, the effects of the pandemic, which has continued to spread, “requires heightened vigilance by the bank to mitigate emerging risks and other complementary measures such as the restructuring of credit lines for existing obligors and provision of liquidity backstops as and when required to safeguard the financial system.”
The deputy governor said stress tests conducted by CBN staff under low to moderate scenarios had revealed that the financial system remained resilient in the face of tightened financial conditions. However, she stated that under severe stress scenarios, certain vulnerabilities in the system were evident.
These, according to her, included reduction in earnings, deterioration in asset quality and decline in capital adequacy.
“The Nigerian economy is facing a significant and unprecedented shock from the COVID-19 pandemic, accentuated by idiosyncratic structural deficiencies.
“It must forestall an imminent severe health crisis, whether a global economic crisis and maintain financial and macroeconomic stability in the light of exchange rate pressures, low foreign exchange flows from crude oil receipts amidst a severely constrained fiscal space and low reserve buffers.
“Like other central banks, the Bank has limited policy options in this circumstance. As it works in collaboration with the fiscal authorities to limit the humanitarian and economic costs of the pandemic, it will be prudent to focus on structural reform and the long term objective of diversifying the economy to enhance its global competitiveness,” Ahmad stated.
According to her, initiatives designed to boost local food and manufacturing production, improve import substitution and support local businesses to meet domestic demand, whilst positioning for export and participation in the global supply chain must be sustained.
In his contribution, Edward Adamu, the deputy governor, corporate services directorate, CBN, recommended that the federal government should set up a trust fund to support the informal sector as part of the overall response to the fallout of the pandemic.
In addition, he said effective coordination of responses and some understanding of sectoral impact of the pandemic would be important in ensuring efficient allocation of resources.