The finance sector needs regulatory buffers to strengthen banks’ capacity to withstand shocks, Central Bank of Nigeria (CBN) Deputy Governor Edward Lamtek Adamu, has said.

In his personal statement contained in the CBN Communique of the last Monetary Policy Committee (MPC) meeting released yesterday, the bank chief said the apex bank also needed to   build   buffers   on   both   fiscal and monetary sides in preparation  for a possible downturn.

He explained that  from a financial  stability standpoint,  inflation  threats or  risks  to  the naira exchange rate stability are to be mitigated upfront in order to sustain and deepen the resilience of the industry.

“In my view, the expected surge in liquidity and  likely  retrenchment  in  inflows  on  account  of  some  external  developments appear  to  be  the  most  potent  threats  to  domestic  economic  and  financial stability   in   the   short-to   medium-term.   In   addressing   these   risks,   policy coordination is key. While public spending is needed to re-invigorate economic growth,  care  must  be  taken  to  ensure  that  its  essence  is  not  defeated  by unintended consequences. Proper coordination of monetary and fiscal policies reduces uncertainty, thereby allowing for optimal deployment of instruments,” he noted.

He noted that “although  current  global  economic  conditions  appear  to  portend  a  favourable short-term outlook for oil prices, we have learned from experience that upswings in  crude  prices  unwind,  most times,  sooner  than  forecasts  suggest.  There  is  no doubt,  the  recent  rally  in  prices  has  had a  positive  impact  on  external  reserves accretion  and  boosted  the  economy’s  resilience  and  investor  confidence,” Adamu said.

He also stated that the nature of portfolio  investment means they are susceptible  to  sudden  reversals, hence the reality  needs  to  be  factored  into  policy  considerations  and  actions  today.

He said the  naira  exchange  rate  continues  to  be  an  important  influence  on  consumer prices  and  output  recovery.

“Stability  in  the  naira  exchange  rate  has  been sustained  through  appropriate  policies  and  reforms  of  the  exchange  rate market  aimed  at  improving  the  supply  of  foreign  exchange  and  reduction  of speculative  and  frivolous demands.  Consequently,  Nigeria’s  stock  of  external reserves   continues   to   grow   on   account   of   reduced   imports,   increased petrodollar  inflows owing to more favorable oil prices and uninterrupted crude production,  and  increased  autonomous  inflows  through  the  Investors’  and Exporters’ foreign exchange (I&E) window,” he said.

He explained that though measured, there have been some improvements in the banking system,  deteriorations  in  financial  soundness  indicators  have  been  halted,  and  in  some cases  reversed.

“For  example,  industry  return  on  asset  (ROA)  and  return  on earnings (ROE) rose quite significantly to 21.57 and 2.14 per cent, respectively, in April,  from  11.78  and  1.28  in  February  2018.  Likewise,  the  non-performing  loans (NPLs) ratio moderated slightly in April. These positive developments are broadly connected  to  the  improvement  in  the  macroeconomic  conditions  including stable  exchange  rate  and  declining  inflation,” he noted.

“Interestingly,  banking  system stability  is  required  for  proper  financial  intermediation  (including  credit  flow  to the  real  sector)  which  is  needed  to  support  recovery  in  output.  The  feedback causation  between  the  banking  system  and  the  real  economy  has  to  be carefully managed always and especially so during this (recovery) phase of the economy’s business cycle,” he noted.

Adamu said the economic outlook appears  stronger,  on  the  assumption  that  inflation  continues  to trend downwards, the exchange rate of the naira remains stable and supply of foreign exchange for needed imports remain unconstrained. “We equally cannot discount  the  role  of  the  CBN’s  interventions  in  the  growth  poles  as  well  as government’s investments in infrastructure. Headline  inflation  continued  to  decelerate  in  April  2018,” he said.

“Year-on-year,  the headline  inflation  index  rose  by  12.48  per  cent  compared  to  13.34  per  cent  in March.  Food  and  core  indices  similarly  rose  by  14.80  and  10.92  per  cent, respectively in April 2018, compared with 16.08 and 11.18 per cent, respectively in March. However, on month-on-month basis, both food and core inflation rose in April. In fact core inflation rose consistently from January to April.

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