Many commercial banks need to raise new capital and boost their capital adequacy ratios for them to drive the desired growth in the economy, the International Monetary Fund (IMF) said at the weekend.
The IMF’s Mission Chief for Nigeria, African Department, Amine Mati, said the commercial lenders needed recapitalisation to secure fresh funds to boost the Federal Government’s chances of achieving the Economic Recovery and Growth Plan (ERGP) target. The ERGP, a Medium Term Plan for 2017 to 2020, is designed to help the Federal Government jumpstart the economy.
Mati spoke at the 2017 Chartered Institute of Bankers of Nigeria (CIBN) Investiture with the theme: Coherent set of policies for greater exchange rate flexibility.
He advised the Federal Government to embark on full Value Added Tax (VAT) reform and cancel tax holidays and exemptions that erode the Company Income Tax (CIT) base. He also urged the government to increase taxes on alcohol and tobacco and broaden VAT by revisiting exemptions.
The last mass recapitalisation in banking occurred in 2005 when the minimum capital base was raised from N2 billion to N25 billion. That exercise reduced the number of banks from 89 to 25 after mergers and acquisitions. Now, there are 21 commercial banks, four merchant banks and one non-interest bank.
The Central Bank of Nigeria (CBN) has continued to advise banks to double provisions on performing loans to two percent to build adequate buffers against unexpected losses, as liquidity ratios fall. Besides, lower revenues for government and oil companies due to plunging crude prices have led to unsecured exposures for banks that are likely to increase credit risk and loan losses. The level of non-performing loans has risen to nearly 15 per cent against five per cent regulatory threshold and lenders need new capital to maintain sound capital adequacy ratio.
While the capital adequacy ratio of most banks is generally above the minimum regulatory threshold of 15 per cent, the adoption of Basel II implies additional capital as banks grow their risk assets.
Besides, banks that are designated as systemically important banks (SIBs) are expected to provide for additional 100 basis points to increase their minimum capital adequacy ratio to 16 per cent as against the general requirement of 15 per cent. National and regional banks need only 10 per cent capital adequacy ratio.
Many banks are already accessing the Eurobond market for tier-2 capital. Market sources said more lenders may return to the capital market for additional funds in the months ahead to create a headroom for loan growth.
On exchange rate policy, Mati described the Investors’ & Exporter’s Forex Window as a good move to address market segmentation, adding that the CBN should unify/ simplify the forex market. He said the current exchange rate was in line with market expectations, but there are significant headwinds, amidst structural challenges and elevated risks.
CBN Deputy Governor (Financial System Stability) Joseph Nnanna, who was elected Fellow of the CIBN, said the exchange rate was converging and moving southward.
He said although the IMF wants the CBN to unify the rates, that can happen organically or inorganically. “For us at the CBN, we believe that organic convergence is the way to go. Inorganic convergence, which is forced, will always produce an arbitrage and that we don’t want,” he said.
In Nnanna’s view, the exchange rate has greatly stabilised. “Before, the naira exchange rate to a dollar was for almost N500/ dollar. Today, it has come down through a combination of policies. We didn’t force it down. It came down organically or naturally, and that’s the way it is supposed to be,” he said.
He said the exchange rate will not rise as the end of year approaches.
“No, the rate will not go up, take it from me. We have achieved stability and the stability is here to stay. The sustainability of the dollar interventions is already evident, the foreign reserve is growing. As I speak, it is $34 billion. When we had volatility, the reserve was as low as $20 billion. But let me say one thing: Nigeria can make do with a reserve level of $20 billion,” Nnanna said.
“All we need to manage the economy and manage it properly is a reserve that can cover at least three months of import.”
Meanwhile, the IMF has advised the Federal Government to urgently revisit tax holidays and exemptions given to companies. It specifically urged Nigeria to implement a reform that would see it phase out tax holidays and exemptions eroding the Company Income Tax base.
Successive governments had granted controversial tax holidays and waivers, which were described as forms of corruption
The Washington-based Fund also asked the Federal Government to increase taxes imposed on tobacco and alcohol, emphasising the need for socially responsible fiscal adjustment based on revenue mobilisation.
The Senior Resident Representative and Mission Chief for Nigeria, Africa Department, IMF, Mr. Amine Mati, who said this in Lagos on Saturday, also stated that the Federal Government needed to reduce interest payments on borrowed funds to about 30 per cent of the country’s revenue.
According to Mati, there is also a need for Nigerian policymakers to move beyond voluntary compliance measures in tax matters in order to mobilise non-oil revenue and increase the fiscal space.
The IMF chief spoke while making a presentation at a forum organised by the Chartered Institute of Bankers of Nigeria.
In the presentation, he stressed the need to embark on full Value Added Tax and broaden it.
On monetary policy, Mati welcomed the recent “de facto” tighter monetary policy stance and said there was a need to “stop the financing of the central bank to the government and strengthen the monetary policy framework.”
On exchange rate, the IMF chief told the Central Bank of Nigeria that the “recent introduction of the Investors and Exporters FX window is welcomed and there is a need to address market segmentation; remove FX restriction; simplify/unify the FX market; and improve operations of the FX market in line with market fundamentals.”
Mati said there were significant economic headwinds amid challenges and elevated risks for the country.
He noted that the Federal Government’s Economic Recovery and Growth Plan was an important step forward, adding that important policies and steps had been taken but policy action remained urgent.
“Comprehensive policy package is needed, including front-loaded non-oil revenue mobilisation, greater exchange rate stability.”
A former President of the Chartered Institute of Taxation of Nigeria, Chief Mark Dike, described tax as a compulsory levy imposed by the government on individuals and companies for the provision of public goods and services.
As a result, he said he was of the opinion that the government should create an enabling environment and provide general incentives for companies, adding that tax waivers and holidays could create a lack of level playing field.
According to him, the government can reduce the tax rate to enable every company and individuals to pay.
In terms of using tax to generate employment in some sectors, Dike said questions had arisen on the number of jobs being created in such sectors.
The Director-General, West Africa Institute for Economic Management, Prof. Akpan Ekpo, said the government might still need to give little tax holidays in order to encourage foreign direct investments and domestic investments in certain sectors.
He, however, said that such tax holidays and exemptions should be given for only a short and definite period of time, and to only very few credible companies that had proven records.
According to him, tax holiday and waivers have been abused in Nigeria and the government needs to watch the manner such are given.
On the need to increase taxes on alcohol and tobacco, Ekpo stated that it was necessary owing to the health hazards they pose.
An economic analyst and Chief Executive Officer of Cowry Asset Management Limited, Mr. Johnson Chukwu, said there was a need for the Federal Government to overhaul the entire tax holiday system, especially in the pioneer sectors, because the current system allowed corruption.
According to Chukwu, there is a need to still give tax holidays and exemptions but it has to be only for a short period on an initial investment. – Punch.
