• ‘Unhealthy fiscal condition, domestic borrowing threaten industrialisation’
• Promote new investments to increase revenue, experts advise
• Credit to public sector soars by over 600% yearly in five years
• Banks, private sector weakening linkage portends danger, Muda Yusuf warns
• ‘SME credit to GDP ratio falls to three per cent’
Nigeria’s hope for a better economic outlook and more jobs continues to dim, as credits to government progressively widen at the expense of private sector lending.
Economic recovery is driven largely by private-sector investment. But credit data in recent years shows increasing crowding-out of private investment.
Data show that while credit extended to the public sector has progressively increased by more than six-fold over the last five years, the banks have not been able to double the private sector credit portfolio.
Data from the Central Bank of Nigeria (CBN) on credit growth indicate that credit to the private sector in the past five years (2018 to 2023), has risen by an abysmal 85.6 per cent while credit to the public sector increased by 518 per cent.
On average, lending to the public sector soared by over 100 per cent yearly within the period whereas, in the case of the private sector, the growth was merely 17 per cent.
The implication is that there are less funds for the private sector while available funds come at a higher cost to private businesses.
The scenario is quite agonising for an economy, which is susceptible to inflationary pressure and characterised by a high debt service ratio, weak infrastructural base and other macroeconomic challenges.
Already, that the nation’s GDP has continued to witness abysmal growth on the back of the ugly scenario means that respite is yet to come for the ailing economy, with a fast rising population.
Nigeria’s yearly real GDP growth rate, which averaged seven per cent from 2000 to 2014 fell to 2.7 per cent in 2015 and -1.6 per cent in 2016. Growth rebounded to 0.8 per cent in 2017, 1.9 per cent in 2018. It rose to 2.27 per cent in 2019 before it came under the weight of COVID-19.
While growth in Nigeria was anticipated to edge further to 2.2 per cent in 2020, it settled at 1.8 per cent constrained by the foreign exchange crisis, supply disruptions in the oil sector and lack of needed reforms.
In 2022, yearly GDP growth rate also moderated to 3.1 per cent, from the 3.4 per cent reported in 2021.
Indeed, Nigeria has been struggling to achieve much faster growth after exiting the 2016 economic recession in 2017, which was assessed to have been induced by heavy dependence on imported inputs and the crude oil price crash.
Several administrations had intended to leverage SMEs to drive growth. But this, sadly, has sparingly, yielded the desired results as federal and state governments continue to borrow more, crowding out the private sector, leaving small businesses gasping for breath.
Market operators also warned that excessive domestic public borrowing will result in extremely-high inflationary pressure on the economy.
Speaking on the extent of the damage excessive public sector borrowing is inflicting on the economy, Former President of the Chartered Institute of Bankers of Nigeria, Uche Olowo, said the economy would not record any meaningful growth in the face of poor funding, an indication that Nigerians will face more hard times.
With the development, he said, commercial banks would not have enough money to lend to SMEs, which would ultimately impede growth.
He pointed out that if the government decides to invest in infrastructure, the private sector would be compelled to explore other borrowing sources, which would lead to inflation and slow down economic activities.
“The economy will suffer and more people will be subjected to abject poverty. It will lead to devaluation. It is a very tough time for Nigerians. Nigerians need to tighten their belt,” he said.
Director, Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, said the private sector has been progressively crowded out from the financial market, which portends great danger for the economy.
He pointed out that private sector credit as a percentage of GDP currently stands at 15 per cent while credit to SMEs is barely three per cent, meaning that the linkage between the private sector and banks in Nigeria is extremely weak.
According to Yusuf, the private sector credit to GDP ratio of other emerging markets is around 50 per cent while the figure is more than 150 per cent in the developed economies.
He also lamented the structure of banks’ deposits, saying they do not support long-term planning even with a high cost of borrowing.
Yusuf blamed the constraining factors on high cost of governance, corruption, tax maladministration and government’s inability to optimise opportunities in oil and gas.
He said unless a deliberate effort is made to tackle these problems, it would continue to be a vicious cycle for the country.
Partner and Head of Transfer Prices & Economic Advisory Services, Dr. Joshua Bamfo, said it is not disastrous for the government to crowd out private businesses that are currently on the verge of collapse due to the harsh operating environment.
“The more the government borrows from the domestic market, the more they stifle private businesses of resources they could have borrowed to expand their businesses for the children. There will be dislocation of resources, “he said.
A stockbroker with Kapital Care Trust Limited, Andy Ishaku, also said that borrowing from the local market could create intense tensions within the system, thereby snowballing into a chain of reactions including the exacerbated cost of borrowing.
“There will be pressure on the real sector in terms of effective business cost and pricing of products and services. Ultimately, the issue of staggering inflation will further accentuate the misery index as individuals and households contend with a decline in their marginal effective values,’’ he said.
According to the National Bureau of Statistics (NBS) Nigerian manufacturing sector recorded a 36 per cent downturn in profit margins from 2021 to 2022 even as inflation is linked as a significant factor affecting the productivity of this sector.
The cost of living for Nigerians is also expected to increase if the downward trend continues.
Head of Equity, Planet Capital, Paul Uzum, said instead of crowding out the real sector, government should consider the international funding agencies IMF or World Bank, which are cheap and come with stringent conditions and economic reforms
Vice President of Highcap Securities Limited, David Adonri, stated that excessive domestic public borrowing could crowd out investment funds from the productive real sector, resulting in inflationary pressure on the economy.