Economic Sustainability: Nigeria’s Central Bank to Fund 78% of Transit Plan

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Economic Sustainability: Nigeria's Central Bank to Fund 78% of Transit Plan

Economic Sustainability: Nigeria’s Central Bank to Fund 78% of Transit Plan

The Central Bank of Nigeria will fund 78% of the N2.3 trillion Economic Sustainability Plan of the Federal Government amidst virus-induced pressure.

The Nigeria Economic Sustainability Plan (NESP), approved by the Federal Executive Council (FEC) on June 24, 2020, was developed by the Economic Sustainability Committee (ESC), established by President Muhammadu Buhari on March 30, 2020.

Chaired by Vice President Yemi Osinbajo, the ESC comprised several Cabinet Ministers as well as the Group Managing Director of the NNPC and the Governor of the Central Bank of Nigeria (CBN).

NESP was designed to responds robustly and appropriately to the challenges posed by the COVID-19 pandemic.

This includes identification of fiscal measures to enhance oil and non-oil government revenues and reduce non-essential spending.

Read Also: Price Instability: CBN Estimates 14.15% Inflation Rate for 2020

It tends to support creation of a financial stimulus package for the Nigerian economy, articulation of specific measures to support the 36 States and the FCT, and very importantly, support for MSMEs and the creation of jobs.Economic Sustainability: Nigeria's Central Bank to Fund 78% of Transit Plan

The NESP has been developed as a 12-month, N2.3 Trillion Naira ‘Transit’ Plan between the Economic Recovery and Growth Plan (ERGP) and the successor plan to the ERGP, which is currently in development.

In the face of a pandemic-induced recession and consistent build up in inflation, Vetiva Capital stated that the MPC was faced with a policy dilemma, which is – raise interest rates to rein in inflation or reduce interest rates to reflate the receding economy.

The Committee however noted that inflation was caused by supply side shocks while noting a rate hike will stifle recovery.

This is coming after 12-month straight inflationary uprising trajectory, with consensus forming that this will continue down the year.

Meanwhile, the Policy Committee decided to reduce the Monetary Policy Rate by 100 basis points to 11.5%, being the second rate cut in the year.

“This expansionary move was necessary as low crude oil prices, lack of fiscal buffers and high debt burden constrains the ability of fiscal authorities to intervene in the economy”, Vetiva said.

In addition to the rate cut, the Committee further adjusted the asymmetric corridor to +100bps/-700bps around the MPR.

The adjustment in the corridor rate effectively reduces the interest income receivable on interest earning deposits with the Central Bank under the Standard Deposit Facility, which was earlier capped at ₦2 billion.

On the other side of the coin, this also reduces interest payable on loans obtained from the Central Bank.

The Central Bank believes this will stimulate lending to the real sector given the moderation in interest expenses occasioned by the drop in the savings deposit rate and existence of LDR checks.

“While we believe the move may induce lending, we do not expect a rapid rise in credit growth to the private sector due to heightened risks in the business environment given energy reforms and ongoing exchange rate unification efforts that can crystallize forex risks”, Vetiva explained.

However, the firm expects increased credit flow to the government as CBN revealed that it will fund 78% of the ₦2.3 trillion Economic Sustainability Plan of the Federal Government.

Economic Sustainability: Nigeria’s Central Bank to Fund 78% of Transit Plan