Nigeria’s total credit to the private sector of the economy was at an all time high of N32.63 trillion as of June 2021, data from the Central Bank of Nigeria shows. This is also the 5th consecutive month of rising domestic credit to the private sector.
Over the last half a decade, the Central Bank of Nigeria has adopted an aggressive policy towards expanding credit to the domestic sector expecting that this will propel GDP Growth Rate. This follows a CBN research report that recommends that private sector credit to major sectors of the economy holds great potential for promoting economic growth in Nigeria.
This has resulted in its policy of combining high loan to deposit ratio and cash reserve requirements as tools used to force banks to lend more to the private sector. Total credit to the private sector since it began this policy in March 2020 has increased by about N4.2 trillion. Commercial Bank lending remains a major component of this total. The CBN estimates bank lending to the private sector at about N22.6 trillion as of May 2021.
In its last monetary policy communique, the apex bank implored on banks to continue extending even more credit as we continue hitting multiple new highs.
“The MPC applauded the continued resilience of the banking system in the face of severe shocks to both the domestic and global economies. Members noted Management’s effort in maintaining a reasonably low level of non-performing loans ratio, even though aggregate credit moderated slightly. The Committee encourages Nigerian banks to extend more credit to consumers and firms to enhance consumption and production activities necessary to strengthen the recovery,” it stated.
While credit to the private sector is on the rise, the CBN data reveals credit to the government fell from N12.4 trillion in May 2021 to N11.74 trillion. In summary, total Net Domestic credit to the overall economy is reported at N44.38 trillion a slight drop from the record N44.5 trillion reported in May 2021. This again highlights the level of credit expansion currently taking place in the country.
Why it matters
As Nigeria reels from an economic crunch that has eroded purchasing power and delivered multiple depreciation, a large part of the formal and informal economy relies on bank lending to jump-start economic activities. Without the financial sector, most industries lack the capacity to produce goods and services and also create direct and indirect jobs.
Apart from banking sector credit, the central bank has also stepped up with over N4 trillion in intervention to most sectors of the economy, enabling the world bank to cite this policy as critical to getting Nigeria out of the recession.
Despite the rise, Nigeria’s total private sector debt as a percentage of GDP (N154.2 trillion as of 2020 FY) is now about 21.1% according to our estimates. To put this into context, South Africa’s private sector credit as a percentage of GDP is over 138%. This suggests there is a huge gap to fill when it comes to increasing private sector debt at an affordable interest rate.
But Currency in circulation dips
CBN reports also reveal Nigeria’s currency in circulation fell in June 2021, a trend we have observed nearly every summer period. According to the CBN data, currency in circulation was N2.74 trillion down from N2.79 trillion in May and off its December peak of N2.9 trillion. The currency in circulation is basically the amount of cash issued by the central bank that is in the hands of its citizens. Because it is physical cash, it is often tracked by the CBN to gauge its effects on money supply. The amount of cash in the hands of most Nigerians has shrunk in value over the years due to rising inflation and depreciation of the exchange rate.