In every decade, the Nigerian banking sector does not experience less than two crises. According to experts, banking crisis evolves when two conditions emerge. The first condition is the significant signs of financial distress in the banking system such as bank runs, losses and liquidations must evolve. The second condition has been premised within the banking policy intervention measures in response to significant losses in the banking system.
Our analyst is interested in understanding these conditions further with special attention to the Nigeria’s data on crises in the banking industry from 1954 to 2014. During the period, existing data show that country experienced 11 systemic crises followed by 10 currency crises in addition 9 sovereign external debt defaults and 12 inflation crises, which could be described as a mixture of ups and downs for the economy. For instance, systemic crisis started from 1987 to 1994. It resurfaced between 2004 and 2005.
Exhibit 1: Category of Crisis between 1954 and 2014
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Exhibit 2: Debt Default between 1954 and 2014
What Effect Do Exchange Rates Have on Nigeria’s Inflation Rates in 30 Years?
On a specific note, our analyst explored the impact of the exchange rate of US dollars on inflation annual (Consumer Price Index) rates in 30 years (out of the 60 years covered in the analysis), which in turn caused banking crises during the period. Analysis reveals -5.3% connection for the exchange rate and CPI. We also found that 0.3% of the fluctuation in the exchange rate could be understood from the CPI [see Exhibit 3].
These results align with the experts’ position that “When the exchange rate of its currency falls against multiple other currencies and the country imports goods from all these countries, the combined effect leads to economy-wide inflation in the country, even if its partner countries don’t raise their prices.” Going forward, our analysis suggests 21.8% increase in CPI for 2020 if the current exchange rate continues without adequate measures to checkmate it. Our analysis specifically indicates that one dollar increase in the exchange of Naira to Dollar would lead to a 21.8% increase in Inflation Annual CPI [see Exhibit 4].
Exhibit 3: Link between Exchange USD and Inflation Annual (Consumer Price Index) in 30 years
Bailout Sustainability and the Need for Stable Exchange Rates
Exhibit 4: Exchange USD per Year
According to our checks, during the period, government officials and experts agreed and disagreed on the rationales for bailout funds given to some banks. They also had divergent views on the policy interventions of the Central Bank of Nigeria and other regulatory authorities. In 2009, Lamido Sanusi, former governor of the CBN hinted that N620 billion was injected into the troubled banks due to non-performing and unsecured loans of the banks which led to tight credit in the economy. Checks have also shown that “Nigeria’s all-share index fell 2.5%, with financial stocks the heaviest losers after a 400 billion-naira ($2.6 billion) bailout of five banks knocked investor confidence in the sector.”
Having seen the gravity of unsecured loans and the cost of bailout on the government, in 2018 the Nigerian government through the Special Presidential Panel for the Recovery of Public Property announced its commitment to recover the $7 billion bailout fund granted to embattled commercial banks between 2006 and 2008 by the Federal Government. A year later, the Federal Government reinforced the need for the banks to revisit the risk management strategy because the use of huge bailout funds may not be sustainable in the financial system.
According to Professor Yemi Osibanjo, the Vice President, “First is the number of institutions, and implicit and explicit tools in our safety system and their sustainability. Perhaps the most significant challenge to the financial system that we have experienced so far was that bank crisis of 2009. “Going by the manner of resolution, it appears that the preferred option was the establishment of Asset Management Corporation of Nigeria – an option that cost something in the order of N5tn. Since then we have also seen the use of a mixture of bailouts and bridge banks.
“The problem, of course, is that the most reliable studies show that overly generous financial safety nets or system have generally tended to increase bank risks and systemic fragility. “My respectful view is that there must be some rethinking of the short and long- term implications of the use of these tools and their sustainability in the coming years. A reference was made in the past that we may not even have that option of the AMCON-type bailout given the sheer amount of money that will be involved.”
Beyond looking at the possibility of readdressing the bailout approach to rescue troubled banks, concerned stakeholders also need to devise the right policy interventions that would solve the exchange rate fluctuation in 2020 and coming years. This is imperative as the World Bank’s Global Economic Prospects report says, “There have been four waves of debt accumulation in the last 50 years. The latest wave, which started in 2010, has seen the largest, fastest, and most broad-based increase in debt among the four. While current low levels of interest rates mitigate some of the risks associated with high debt, previous waves of broad-based debt accumulation ended with widespread financial crises. Policy options to reduce the likelihood of crises and lessen their impact should they materialize include building resilient monetary and fiscal frameworks, instituting robust supervisory and regulatory regimes, and following transparent debt management practices.”