IMF boss warns that Nigerian banks are at risk because of declination in oil Price

MD, International Monetary Fund, IMF, Ms.

Christine Lagarde, has warned that the
prevailing uncertainty in the oil and gas industry
could plunge the Nigerian financial system into
crisis. In a statement during her visit to Nigeria
last week, Lagarde also expressed concerns
that firms that had increased their leverage and
dollar-denominated debts over the last couple
of years may come under pressure due to rising
interest rates, a strong dollar and a declining
naira.
She said: “Growth in 2015 is estimated at about
3.2 percent, its slowest pace since 1999, and
only a modest recovery is expected in 2016. For
a country with a rapidly increasing population,
this means almost no real economic growth in
per capita terms.
“On top of the slowdown, vulnerabilities have
increased. The ability to manage shocks is
restricted by low fiscal savings and reserves.
And the weakening oil sector could stress
balance sheets and put pressure on the banking
system.
“Reduced confidence and lower capital
spending would also impact the non-oil
corporate sector. Unfortunately, this sector
looks less resilient today than during the
downturn of 2008-09. Companies that have
increased their leverage and US-dollar debt in
recent years may now come under pressure as
they face rising interest rates and a stronger
dollar.”
She gave the Nigerian financial sector a pass
mark, saying that Nigerian banks are generally
well-capitalised and more resilient than during
the downturn of 2008 and 2009.
However, she noted that the banks are
beginning to feel the impact of the growing
vulnerabilities in the corporate sector, leading
to rising non-performing loans, which will need
to be carefully monitored and managed.
According to her, “The new reality of low oil
prices and low oil revenues means that the
fiscal challenge facing government is no longer
about how to divide the proceeds of Nigeria’s
oil wealth but what needs to be done so that
Nigeria can deliver to its people the public
services they deserve – be it in education,
health or infrastructure.
“This means that hard decisions will need to be
taken on revenue, expenditure, debt, and
investment going forward.”
She further said that given the structure of the
Nigerian economy, the massive fall in oil prices,
which is expected to continue, has changed the
medium term foundations for economic
resilience.
She said: “Additional exchange rate flexibility
both up or down can help soften the impact of
external shocks, make output and employment
less volatile, and help build external reserves.
“It can also help avoid the need for costly
foreign exchange restrictions which should, in
any case, remain temporary. And going forward,
improved competitiveness from improved
exchange rate flexibility and other reforms will
facilitate the needed diversification of the
exports base and, ultimately, growth.”
To this end, Lagarde advised that the key policy
priorities of government at all levels should be
to invest in quality infrastructure, make the
banks work, and improve governance.