The Managing Director, of Cowry Asset Management Limited, Mr. Johnson Chukwu has said that the hawkish monetary approach by the Central Bank of Nigeria (CBN) which saw a further increase in interest rate by 16.5% would increase the non-performing loan book of banks.
Chukwu stated this while speaking on the downside effect of the increase to the economy at a Webinar tagged ‘Nigerian Economic Report Card (2022 Full Year Review)’.
He noted that in the near term, the outlook of the banking sector is positive because of the higher interest rate as some of them will enjoy the windfall but many business operators may not meet the loan obligation going forward which would help to beef up the non-performing loan book.
He explained that CBN has said it severally that they will continue the hawkish monetary approach in an effort to curb inflation which according to him the current approach will not be enough to achieve the aim due to the factors that lead to inflation.
Drivers of inflation: Chukwu listed some of the factors that are propelling inflation including insecurity in the country which has weakened food production, the effect of the depreciation of the naira, the cost of importing energy input, the ways and means of funding FG by the CBN, among others.
- “As long as the apex bank believes that increasing interest rate will solve the problem of inflation, is clear in my mind that a couple of things will give in. Every economic problem will have some lag effects, lag effect in the sense that the negative impact may not come immediately.
- “Increase in the non-performing loans will happen and when the default will occur, the CBN will be looking for how to fight that or how to set up another bad bank, and that time it will be done on us that the current approach will not solve the problem.
As long as those issues that fuel inflation have nothing to do with whether I got money from the central bank for spending or I borrowed for consumption then the current approach won’t solve the inflation,” he said.
Ways and Means: Chukwu advised the CBN to stop lending to the Federal Government adding that lending to the government by Ways and Means stimulates liquidity in the economy as it will increase the cash in the system.
According to him a look at the report from the National Bureau of Statistics showed that as of November last year, the currency in circulation increased by 11.3%.
- “If you compare it with GDP growth of 2,25% we are having excess liquidity, where is it coming from, it is not coming from great expansion, it is coming from ‘Ways and Means’. The report I read showed that by October last year, the government has borrowed from CBN about N6 trillion, that went into consumption that is not backed by goods and services produced,” he said.
