BY COBHAM NSA – The Central Bank of Nigeria (CBN) has expressed concerns that Nigeria’s economy faces huge risk given its exposure to high percentage of credits from foreign holdings.
The apex bank’s caution is against the backdrop that foreign investments account for over 40 per cent of total credits available to the economy within the capital and money markets.
Deputy Director of Financial Policy and Regulation Department of the CBN, Mr. Hassan Mahmoud, who dropped the hints, said the development therefore puts the economy in a dangerously unstable position.
Mahmoud explained that with the volume of foreign portfolio investments in the money market at well over $20 billion, withdrawal of such funds could potentially cause havoc on the economy.
Addressing a workshop for Business Editors and Finance Correspondents organised by the Nigeria Deposit Insurance Corporation (NDIC) in Yola, Adamawa State, Mahmoud said; “Of the total activities in the capital market, 40 per cent of them are from foreign holdings.”
According to him, “Even in our money market too, substantial part of the foreign portfolio investments accounts for over $20 billion.
“Over 40 per cent 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, substantial part of our input or raw materials are still imported. Those hike in prices are going to feed into our domestic prices.”
On borrowings by many Nigerian corporate bodies, including government, from the international markets, the CBN Official said; “Our total borrowings now are over $10bn; 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 said Nigeria’s Gross Domestic Product (GDP) has witnessed improved performance, especially given where the nation is coming from, but considering “where we are going, we are far behind.”
“The GDP as of today from the National Bureau of Statistics (NBS) is 2.28 per cent. However, if you look at 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.”
Citing the Chinese example, the Deputy Director said the Asian country was doing 10 per cent before the crisis, but has moved from seven to eight per cent in less than 10 years, adding that other emerging economies have also surpassed their pre-crisis growth rate and Nigeria can do it.
“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.”
He said; “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.”
Noting that the non-oil sector still remains the major contributor to the GDP, which includes agriculture and manufacturing, Mahmoud stated that Nigeria can no longer rely on the oil sector as its major revenue earner because it currently contributes less than 10 per cent to the GDP.
While quoting NBS statistics indicating significant increase in the contribution of the non-oil sector, whose components also include services like Telecoms and IT among others, the apex bank official however warned that more people are likely to be in abject poverty if agriculture, as the largest employer of labour and the largest population engagement is not producing the level of expected output in the economy.