The World Bank said the Central Bank of Nigeria’s development finance intervention is fueling short-term inflation and weakening the apex bank’s ability to control inflation.

According to the World Bank, the CBN’s continued provision of subsidized finance to certain sectors must slow down as it undermines the ability of commercial banks to lend on a risk-adjusted pricing basis. He added that the apex bank’s disbursements to the private sector, with its share of credit to the private sector falling from 6.5% in 2019 to 10% in 2021.

He revealed this in his “Nigeria Development Update (June 2022): The Continuing Urgency of Unusual Cases”. He said: “The CBN’s continued provision of heavily subsidized finance to certain sectors undermines commercial banks which lend on a risk-adjusted pricing basis and need to be curtailed.

“CBN disbursements are increasing in private sector financing, with CBN’s share of credit to the private sector increasing from around 6.5% at the end of 2019 to 10% at the end of 2021. Although some of the COVID-related tools deployed by the CBN are phased out (e.g. the moratorium on principal repayments of CBN-funded credits expired in March 2022), the Central Bank has introduced new intervention facilities without a publicly available assessment of their impact.

“The CBN also stepped up disbursements and kept the policy rate unchanged at 11.5% from September 2020 to May 2022. On March 15, 2022, the CBN extended the interest rate of 5% pa on its development financing intervention funds. until the end of February 2023.

“The Monetary Policy Committee has strongly encouraged the central bank to continue its development finance interventions, including a policy tool to help contain rising inflation. However, this stance fuels short-term inflation from of high aggregate demand and weakens the ability of the central bank to effectively control inflation.

According to the Washington-based bank, expanding government programs to support micro, small, and medium enterprises is a priority to protect viable and vulnerable MSMEs from growing uncertainty.

He said while the banking system has shown resilience in the face of the pandemic, the operating environment for banks and businesses has become more challenging recently. He said the fallout from the war in Ukraine is driving up inflation, raising production costs and the cost of borrowing through higher rates.

He further stated that the quality of loans in the coming quarters is likely to deteriorate. He added that some medium-sized banks that cater to SMEs and intermediary financing of CBN development could be stressed if the economic recovery falters and SMEs, many of which have already suffered over the past two years, have generally suffered. less resilience in revenue generation than larger, more diversified companies.