The World Bank has stated that the CBN’s continued development finance intervention in the private sector propels inflation and weakens the ability of the central bank to efficiently control inflation.
This the international Organization disclosed in a document titled ‘’Nigeria Development Update – June 2022’’.
The World Bank believes that though the CBN was instrumental to the expansion of credit and prevention of a reduction in the general availability of loans to the private sector, this continued provision of heavily subsidized loans will have an unpleasant impact on the Nigerian business environment.
The world bank said, ‘’ the Monetary Policy Committee has strongly encouraged the central bank to continue its development finance interventions, including a policy tool to help tame rising inflation. However, this stance fuels inflation in the short term from elevated aggregate demand and weakens the ability of the central bank to control inflation efficiently’’.
Data from the CBN shows that through March 2022, net domestic credit grew robustly—21.3 percent year-on-year—showing a surge in private sector credit.
The World Bank also emphasized that the CBN has to restrain its intervention with low-cost loans in the private sector as iterodes commercial banks’ practice of lending on a risk-adjusted basis.
The world Bank said, ‘’ the CBN’s continued provision of heavily subsidized funding to certain sectors undermines commercial banks that lend on a risk-adjusted pricing basis and needs to be dialed down’’
World Bank also stated that, ‘’expanding government programs to support micro, small, and medium enterprises (MSMEs) is a priority to protect viable and vulnerable MSMEs against rising uncertainty. However, the operating environment for banks and firms has been challenging recently, following the fallout of the war in Ukraine driving inflation higher, increasing production costs, and the cost of borrowing through higher rates, thus making loan quality over the next several quarters likely to deteriorate’’.
What this means is that the profitability of banks will significantly reduce as poor loan quality makes banks charge expected losses against their earnings.
