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De-risk business environment to unlock funding, ex-LCCI boss advises government

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The Director General, Lagos Chamber of Commerce and Industry, Musa Yusuf

The former Director-General of the Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf, has called on the government to reduce the business environment risks to make the real sector attractive to banks.

Yusuf stated this at the Finance Correspondents Association of Nigeria (FICAN) bi-monthly seminar on the economy and outlook of the financial service sector.

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He noted that banks are concerned about the risks of lending to sectors targeted by special intervention funds of the Central Bank of Nigeria (CBN).

“For intervention funds, banks are concerned about the risk of lending to targeted sectors as the high level of risk is not commensurate with interest rates of the intervention facilities. This reinforces the need for policymakers to intensify efforts in de-risking the real sector to bolster banks’ confidence,” he said.

Following the high risk of lending to manufacturers, especially the small and medium enterprises (SMEs), Yusuf said, the cost of funds to the non-prime borrowers was still close to 30 per cent. He charged the government to address the numerous risk factors, including insecurity, which discourages the banks from lending to the sector.

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The ex-LCCI DG said that banks were cautious of lending to sectors with high exposure to foreign exchange owing to the illiquidity challenge. Foreign exchange volatility is associated with risks relating to asset quality and financial stability, he stressed.

According to the economist, while the country’s debt to gross domestic product (GDP) is below 55 per cent recommended by the World Bank and International Monetary Fund (IMF) for emerging markets, the country’s “high debt cost to revenue portends significant risks to fiscal sustainability. Debt costs accounted for over 90 per cent of Federal Government’s retained revenue between January and May 2021 and policymakers have continued to depend on debt and unconventional measures (CBN ways and means facility) to fund the national budget”.

He was concerned that public sector borrowing had a crowding-out effect on the private sector, warning that revenue mobilisation remained weak at around five per cent of GDP amid even as high governance cost and subsidy financing weighed heavily on the economy.

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“Meanwhile, the gradual uptick in interest rates on government securities (notably sovereign bonds, savings bonds, and treasury bills) implies that the Federal Government would spend more on debt servicing in the near to medium-term amid dwindling fiscal revenues,” he said.

On inflation, he attributed the recent deceleration to base effects associated with last year’s price level, noting that prices are being driven by the combination of structural factors (insecurity, FX shortage, exchange-pass through effect, higher energy costs, poor infrastructure, supply-chain disruptions) and monetary factors such as fiscal deficit monetisation.

“Inflationary environment elevates production costs with adverse impact on corporate profitability, thereby making it increasingly difficult for businesses and corporates to meet their debt obligations to lending institutions.

This transmits into a significant increase in credit loss provisions with adverse impact on banks’ profitability,” he said.

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