Banking System Liquidity Seen Rising as FG Moves to Settle Contractors, Others

The move by the federal government to prevent further blemish to its credit rating by securitising and restructuring some long dated existing financial obligations of approximately N2.7 trillion is expected to strengthen banking system liquidity.

The Financial Derivatives Company Limited (FDC) stated this in its Economic Bulletin for July titled: ‘Rising public sector debt, a ticking time bomb’, obtained yesterday.

The Nigerian banking system has been vulnerable to commodity price and currency volatility shocks. However, one of the weaknesses of the sector has been the high default rate of debtors.

According to the report, nonperforming loans in the banking system are now believed to be approximately 16 per cent of total risk assets.

Last year, Fitch Ratings reduced the Support Rating Floors of 10 Nigerian banks to “No Floor” on the backdrop of rising foreign debt and lack of institutions to cushion these banks in the event further shocks to the system. Major contributors to the asset quality problem of the sector are government contractors as well as some government employees.

The banks now shun more loan requests by government and public sector contractors. In the past two rounds of bank distress, government delinquency was a major catalyst of bank failure.

Crucially, many of the loans obtained by contractors affected by federal government loan default had been written off as non-performing loans by these banks leading to many rating agencies questioning the strength of the banking system in withstanding further shocks.

Also, most of the banks also sustained significant losses to their share values and as such increased liquidity is to facilitate a tapering in the speculation of a banking crisis, the report stated.

According to the report, Nigeria has a reputation of chronic indebtedness and financial delinquency dating as far back as the 1970s, when Nigerian debt was ruled as sub-standard by the London Club of Bankers.

It cited the case of the cement armada whereby defaulting on confirmed irrevocable Letters of

Credit was the first time the government of Nigeria became a documented defaulter in the international arena.

Furthermore, it stated that the accumulation of arrears on trade finance then, resulted in a rescheduling of trade and payable debts in the 1980s.

Also, the cumulative effect of the piecemeal and unstructured approach to debt servicing (accounts for 66% of recurrent income) resulted in a choking debt trap. In the end, Nigeria’s accumulated external debt reached a level of $36 billion (HIPC – Heavily Indebted Poor Countries). A combination of deft negotiation and a payment of $18 billion comprehensive debt forgiveness were achieved in 2005.

On the domestic front, the report stressed that the delays and default in payment for bona fide transactions such as the JV cash calls have strained the financial reputation of the federal government.

To this end, the report described the securitisation of debt through promissory notes as a step taken by the government to address debt to ‘helpless creditors’ of the government such as FGN