The Central Bank of Nigeria (CBN) has said it will carry out loan reclassification  and periodic stress tests on banks to determine the soundness of the financial sector.

CBN Director, Research Department, Michael Adebiyi, who broke the news yesterday said the move would enable it to ascertain the liquidity position of the financial system and gauge the banking sector’s systemic health.

Speaking at the Chartered Institute of Bankers of Nigeria (CIBN) mid-year review of the economic outlook 2022, in Lagos, he said the apex bank will institute mandatory provisioning for the banks to ensure the risk of a significant deterioration in the quality of restructured loans is addressed.

Adebiyi said the move was necessary following the resurgence of the COVID-19 pandemic, and the Russia-Ukraine crisis,  which require the CBN to be thoughtful and guarded against negative fallout that may arise in the second half of the year.

He said these developments have waned down on global growth prospects, heightened inflationary pressures across economies, caused portfolio rebalancing in the financial markets and triggered tightening of global financial conditions.

Adebiyi said that global financial markets have remained volatile, driven, mainly, by risks associated with the Russia-Ukraine war and monetary tightening by major central banks.

“Financial market data suggests that investors have rebalanced their portfolios from equities and precious metals, like gold, to fixed-income securities. This is to take advantage of rising yields in the advanced economies as major central banks progress with the interest rate hike,” he said.

He said policy rate hike in Nigeria could lead to disruptive portfolio adjustments that could heighten financial markets fragilities, imbalances, and vulnerabilities.

Regarding the money market,  he said the hike in the interest rate is expected to induce wealth redistribution from borrowers to savers.

“This will result in an uptick in the inflow of foreign investment, as the rate hike provides an incentive for foreign investors to invest in high-yielding fixed-income securities such as treasury bills and government bonds. In the same vein, the naira is expected to stabilise in the mid-to-long-term, as higher interest rates mean more foreign portfolio inflow and a stronger naira,” he said.

In the near-term, he said the CBN expect the rise in interest rates to improve the investment climate to remain competitive. Financial markets will remain upbeat as investors continue shopping for the highest interest rate on their short-term investments.

Nigeria’s external reserves are projected to remain stable against rising crude oil prices. The Bank’s intervention in the foreign exchange market, subsidies on premium motor spirit (PMS), rising import bills, and increased external debt-servicing would, however, remain impediments to reserves accretion.

He said future of the economy looks optimistic given the various efforts of the CBN at repositioning the financial and real sectors of the economy for sustainable development. However, more still needs to be done, particularly in the agricultural sector and ICT.

To restore relative stability in the foreign exchange market, the bank is also expected to sustain the 100-for-100 Policy for Production and Productivity (PPP) and the Naira-4-dollar scheme and enhance the FX position in the I&E window by encouraging the participation of top 100 non-oil exporters in the RT200 FX programme. These would help stabilise the exchange rate and boost reserves accretion in the short-to-medium term.

On the external front, he said emerging developments have improved the performance of Nigeria’s trade balance, due mainly to rising international crude oil prices.

“The sector improved with a lower overall balance of payments deficit of US$0.88 billion (0.8 per cent of GDP), in the first quarter of 2022, relative to US$1.28 billion (1.1 per cent of GDP), in the preceding quarter. Furthermore, an aggregate capital inflow of US$3.33 billion was recorded in the first quarter of 2022, as against a capital reversal of US$2.85 billion, in the preceding quarter,” he said.

However, Adebayo said gross external reserve was US$39.22 billion at end-June 2022, compared with US$40.23 billion, at end-December 2021. The decline was due largely to interventions by the CBN in the foreign exchange market.

Speaking on the economy, he said outlook for domestic growth, for the rest of the year, is positive as the Nigerian economy is projected to maintain its upward trajectory on the back of policy support and rebound in crude oil prices. Specifically, the Nigerian economy is forecast to grow in 2022 by 3.33 per cent (CBN), 4.20 per cent (FGN) and 3.40 per cent (IMF).

“The positive outlook is predicated on the effective implementation of the 2022 National Budget and the Medium-Term National Development Plan (MTNDP), and the positive impact of CBN interventions on growth-enhancing sectors. However, mounting uncertainties resulting from the ongoing Russia-Ukraine war, as well as, significant headwinds, such as rising energy prices, the rising cost of production of goods and services, the risk of stagflation in the US, and the persistence of legacy security and infrastructural problems, could undermine the positive outlook in the short-to-medium-term,” he said.

The CBN director said inflationary pressures are expected to remain elevated in the near-term due to rising energy and food price. “Headline inflation would be driven, largely, by rising transportation costs, disruption of electricity supply, the persistent security challenges in some parts of the country, increased political spending in the build-up to the 2023 general elections, and the spill backs and spill-overs effects of the Russia-Ukraine crisis. However, the various interventions of the Bank and the Federal Government of Nigeria (FGN) are expected to moderate prices in the near-term,” he said.

He said non-oil revenue is expected to rise in the second half of 2022, given the extension of the date for filing tax returns by companies in Nigeria from June 30, 2022, to August 31, 2022, by the Federal Inland Revenue Service (FIRS).

This is in addition to the end-of-year effect of tax filing. Furthermore, the continued implementation of the Finance Act 2022, under the Strategic Revenue Growth Initiatives (SRGIs) of the FGN and its bold tax broadening reforms, also expected to enhance revenue outcomes in the coming periods.

Adebiyi said another headwind to a positive fiscal outlook is the potential widening of the fiscal deficit.

“The projected rise in the budget deficit by N965.42 billion, following the passage of the amended 2022 Appropriation Act is expected to induce additional domestic borrowing and raise the government’s debt profile. Although public debt levels are expected to remain within the 40.0 per cent threshold level and government revenue is anticipated to be further eroded by the rising burden of interest payments,” Adebiyi said.