Introduction

It has been widely predicted that the Corona Virus Infectious Disease 2019 (COVID-19) pandemic would lead to a paralysis of the economies of several nations both developed and developing, though it presents more peculiar challenges to emerging economies. On the one hand, prior to this global pandemic, McKinsey & Company had earlier in the year predicted that the growth estimate for the African economy would be at 3.9%1. On the other hand, McKinsey now predicts two growth estimates determined by the level of containment of the pandemic. The first is the best case scenario where the outbreak is contained globally and in Africa, the growth rate drops to 0.4%. The second scenario is where there is a lack of containment globally and in Africa, the rate drops to as low as -3.9%.2 The International Monetary Fund's (IMF) Managing Director, Kristalina Georgieva3 stated that the IMF anticipates the worst economic fallout since the Great Depression of the 1930s. The IMF further estimates that the global economy will shrink by 3.0% in 2020.4

Financial System Prescription

Regulators are responding quickly to the challenges for the financial services sector, to reduce the collapse of businesses, and to ensure the ongoing operation of the sector. The IMF advises that in so doing, regulators must do the following5:

  • Ensure to implement new initiatives, be more lenient to banks in meeting regulatory requirements as the focus should be on maintaining operations. This is the approach that has been taken in Nigeria. The Governor of the Central Bank of Nigeria (CBN), Mr. Godwin Emefiele at a meeting held by the Bankers' Committee on March 21, 2020 noted that the industry has resolved that profit would not be the primary motive at this time. Rather preserving confidence, financial stability and support for the economy will be the overriding objective.6
  • Regulators must communicate clearly that capital and liquidity buffers should support continued bank lending without adverse consequences for bank management.
  • Regulators should encourage loan modification and remind banks about flexible credit risk management and the accounting standards for impairment in these situations. The policies that have been initiated by the CBN in this regard shall be highlighted below.
  • Regulators should encourage banks not to hide losses as transparency would prepare all stakeholders (banks, investors, shareholders and taxpayers who bear the losses) especially because surprises only worsen responses as was proven during the 2008 crises.
  • There should be clarification as to how fiscal measures targeted at borrowers, credit guarantees, payment holidays, direct transfers and subsidies should be treated.
  • There must be strengthened communication between regulators and banks.
  • Collaboration between national regulators at the international level.7

Legal perspectives of the Central Bank of Nigeria's Policy Responses to Covid-19

As indicated above, apex banks and financial regulators are issuing policies each day to manage the impact of the pandemic on businesses and the economy especially with regards to credit management. Earlier in the year, the Central Bank of Nigeria (CBN) had already begun making efforts to strengthen the economy through increased government spending and tax cuts for businesses. Public budget increased from N8.83tn (Eight Trillion, Eight Hundred and Thirty Billion Naira) approximately $24.53bn (Twenty Four Billion, Five Hundred and Thirty Million United States Dollars) in 2019 to N10.59tn (Ten Trillion, Five Hundred and Ninety Billion Naira) approximately $29.42bn (Twenty Nine Billion, Four Hundred and Twenty Million United States Dollars) in 2020, representing about 11% of the national GDP8.

The global pandemic has had several adverse consequences on global economy, with particular emphasis on the Nigerian economy, affecting the crude oil price and supplies, capital and financial markets, sporting events, entertainment and hospitality industries etc. Consequently, the Federal Government has had to adjust its budget by cutting the crude oil benchmark price from $57 (Fifty-Seven United States Dollars) per barrel to $30 (Thirty United States Dollars).

In a bid to prevent a total economic meltdown, the CBN on March 16, 2020 released a Circular to Deposit Money Banks and The General Public on "CBN Policy Measures In Response To Covid-19 Outbreak and Spill Overs"9 , this was followed by a number of policy measures to mitigate the adverse effects of the pandemic on the Nigerian economy issued by the Governor of the CBN, Mr Godwin Emefiele including:

  • Extension of Moratorium: The CBN stated that all its intervention facilities were granted a further moratorium of one year on all principal repayments. In essence, all intervention loans that are currently under moratorium are granted an additional period of one year to be effective from the 1st day of March, 2020. A moratorium is a temporary suspension of an activity or a law until future events warrant lifting the suspension or related issues have been resolved10. A moratorium is usually imposed by a Government to suspend payment obligations for a certain period. In essence, the Lender cannot maintain a right of action against the Borrower for default in re-payment of loans during the period of moratorium. In effect, CBN has suspended its rights to enforce the principal loan re-payment from the Borrowers under its intervention programme until February 28, 2021.
  • Interest Rate Reductions: This policy seeks to reduce the interest rate on all CBN intervention loans from 9% to 5% per annum for one year, effective March 1, 2020. CBN currently has about N3tn (Three Trillion Naira) in intervention programmes operated through various Deposit Money Banks (DMBs)11. In effect, benefactors of the intervention loans prior to this Circular are not expected to calculate interests at the rate of 9% per annum on the CBN intervention loans commencing from March 1, 2020 but at a subsequent rate of 5% per annum. This reduces the liabilities of the participants in the intervention programmes, and is expected to cushion the effect of any economic setback they might have on the basis of the COVID-19 pandemic.
  • Creation of a 50 Billion Naira Target Credit Facility: In a further bid to cushion the effects of the pandemic, the CBN also established a N50bn fund to support households and Small and Medium Scale Enterprises (SMEs) affected by COVID-19.
  • Credit Support for Healthcare Industry: Due to the increase requirements of the health sector, the CBN intervention loan facilities were opened to companies, hospitals and Healthcare practitioners operating in the health sector to meet up with the daily upscaling demands caused by the covid-19 pandemic12. The CBN subsequently stated that an intervention fund of N100bn (One Hundred Billion Naira) will be provided as support for the health industry.
  • Regulatory Forbearance: DMBs were granted the leave to consider a temporary and time-limited restructuring of the tenure of loan terms for businesses and households affected by the Covid-19 pandemic. The wordings of the CBN's directive in this regard raises questions whether the directive was mandatory or discretionary. It appears that this policy gives the DMBs the unilateral option to elect whether to restructure the loans or not. It is therefore clear from the above that DMBs are not bound to temporarily restructure the tenure of loan terms for businesses and households affected by the Covid-19 pandemic. It is however advisable for DMBs to consider restructuring the loan terms for two reasons:
    • Where the loan contract contains a force majeure clause, Borrowers are likely to be quick to activate such force majeure clause relying on the Covid-19 as an Act of God preventing performance of their obligations in the contracts.
    • The Borrower may rely on the doctrine of frustration on the ground that he is prevented from or unable to perform his obligations under the contract due to the pandemic which was outside the sphere or purview of the contract.
  • Adjustment of the Official Exchange Rate: The continuous drop in the global oil prices13 has led the CBN to adopt a strategy by moving the FX sales rate to Foreign Portfolio Investors (FPIS) to N380.2/$, from N366.7/$, in a move that suggests a technical devaluation of the Naira. The CBN also adjusted the official exchange rate to N360 per dollar from N307 per dollar. This will greatly impact contracts that are denominated in the United States Dollars or other foreign currencies, but transacted in Naira. The foreign exchange rate movement will largely impact parties' financial statements. It might be prudent at this stage for parties to consider hedging their foreign exchange risks by the use of Forward Contracts, Currency Swap Agreements or Options Contracts in a bit to mitigating their future liabilities.

On March 23, 2020, the CBN also released a Circular to Deposit Money Banks and the General Public on "Guidelines For the Implementation of the NGN50 Billion Targeted Credit Facility".14 The scheme is to be financed from the Micro, Small and Medium Enterprises Development Fund (MSMEDF) and the participating institution is the NIRSAL Microfinance Bank (NMFB).

A Circular was also released on March 25, 2020 on "Guidelines For the Operations of the NGN100 Billion Credit Support For the Healthcare Sector".15 Further policies have also been initiated by the Bankers' Committee and individual banks, for instance, banks have announced that they would give a (ninety) 90 days' moratorium on loan repayment by SMEs on food industry credit, fashion industry credit and quick credit for businesses. Consequent to the above, DMBs and Borrowers are advised to properly document the moratorium with a view to protect the Borrowers from pre-mature obligations and liabilities.

The New Nigeria: Policy Response Timeline

The CBN Governor on April 14, 2020 released a position paper titled "Turning The Covid-19 Tragedy into An Opportunity For A New Nigeria". Mr Emefiele in the paper posited that the pandemic and economic disruptions have emphasised the issues with Nigeria's economy and the CBN developed a Policy Response Timeline to guide intermediate, short and long term crises management policies, and the "orderly reboot of the Nigeria economy" as follows:

Immediate-Term Policies (0-3 Months)

The Governor highlighted the steps which the CBN has taken towards promoting a sound financial system while the pandemic is ongoing. These steps are the policies which have earlier been highlighted in this paper.

Short-Term Policy Priorities (0-12 Months)

The CBN noted that as soon as the pandemic has been curtailed, Nigeria's economic space will be re-positioned by taking the following steps:

  • Reinvigorate financial support for the manufacturing sector by expanding interventions through its value chain and ensure that primary products are sourced locally.
  • Embark on a project to get banks and private equity firms to provide long term finance for home-grown and sustainable healthcare services to reverse medical tourism out of Nigeria.
  • To promote the establishment of InfraCo Plc, a word class infrastructure development vehicle wholly focused on Nigeria with combined debt and equity take-off capital of N15tn (Fifteen Trillion Naira) to support transport infrastructure required to move agricultural products.
  • Continue to prioritise the provision of FX for the importation of machinery and critical raw materials needed to drive a self-sufficient Nigerian economy.

Medium-Term Policy Priorities (0-3 Years)

To promote faster recovery of the economy by targeted measures towards particular sectors that are able to support mass employment and wealth creation. The focus will be on four main areas:

  • Light Manufacturing: through a N500bn (Five Hundred Billion Naira) medium term facility for manufacturing firms to procure state of the art machinery and automated manufacturing models. As well as support increased patronage of locally processed products (cement, steel, iron rods, doors, etc.)
  • Affordable housing: to bridge the housing deficit in the country by creating a fund targeted at housing construction. Implement friendly foreclosure laws and reduce the cost of land documentation.
  • Renewable energy production: provide support for the financing of environmentally friendly energy production to promote long term health benefits.
  • Cutting-edge research: To drive innovation through research in every sector through universities, research institutes, creative industry initiatives and other media of novelty and inventions.

Conclusion and Recommendations

The economies of the world are currently facing an unprecedented challenge which requires innovative and a resolution based approach. Although the Central Banks of various Countries have put in measures to flatten the curve on the economic impact of COVID-19, Economists have predicted that this pandemic will leave negative indelible mark on global economy. Countries are therefore urged to consider reducing the effects of this pandemic as well as making robust macro-economic policies to stimulate the growth of their respective economies leveraging on public private partnerships and inter-sectoral/ governmental collaborations.

With an alarming debt profile of N27.4tn (Twenty Seven Trillion, Four Hundred Billion Naira) about USD84bn (Eighty Four Billion United States Dollars) as at December 2019 , and a declining foreign reserve, Nigeria must stay alert to prevent further economic decline. The CBN has taken very bold and commendable steps in cushioning the impacts of the COVID-19 on the Nigerian economy. DMBs, practitioners in the health sector, manufacturers, entrepreneurs and investors are urged to make good of these polices to ensure a seamless revival from the potential economic impact of this pandemic. The legal implications of the policy initiatives of the CBN must also be well thought through to ensure seamless application and to achieve the desired results.

Footnotes

1. Kartik Jayaram, Acha Leke, Amandla Ooko-Ombaka, and Ying Sunny Sun, "Tackling COVID-19 in Africa" https://www.mckinsey.com/featured-insights/middle-east-and-africa/tackling-covid-19-in-africa last accessed April 10, 2020

2. McKinsey & Company, "Tackling covid-19 in Africa (April, 2020) https://www.mckinsey.com/featured-insights/middle-east-and-africa/tackling-covid-19-in-africa last accessed April 10, 2020

3. Kristalina Georgieva made these remarks on Thursday, April 9, 2020 during her address on "Confronting the Crisis: Priorities for the Global Economy" on The Economic Times ahead of next week's annual Spring virtual meeting of the International Monetary Fund (IMF) and the World Bank.

4. David Lawder, "Global Economy in 2020 on Track for Sharpest DownTrun Since 1930s: IMF" (Reuters, April 14, 2020) Last accessed April 15, 2020

5. Tobias Adrian and Aditya Narain, "Maintaining Banking System Safety Amid The COVID-19 Crises (IMFBlog, https://blogs.imf.org/2020/03/31/maintaining-banking-system-safety-amid-the-covid-19-crisis/ last access April 12, 2020

6. Omolola Famodun, "COVID-19: CBN, Bankers' Committee Pledge N3.5 Trillion To Pharma Companies" (Pharmanews, March 23, 2020) https://www.pharmanewsonline.com/covid-19-cbn-bankers-committee-pledge-n3-5-trillion-to-pharma-companies/ Last accessed April 14, 2020

7. (n 10, IMF) k

8. Chukwuka Onyekwena and Mma Amara Ekeruche, "Understanding the impact of the COVID-19 outbreak on the Nigerian economy" (Brookings, April 8, 2020) https://www.brookings.edu/blog/africa-in-focus/2020/04/08/understanding-the-impact-ofthe-covid-19-outbreak-on-the-nigerian-economy/ last accessed April 10, 2020

9. FPR/DIR/GEN/CIR/07/049

10. Will Kenton, "Moratorium" (Investopedia, June 14, 2019) https://www.investopedia.com/terms/m/moratorium.asp last accessed April 17, 2020

11. Ajifowoke Michael Gbenga, "CBN POLICY RESPONSE DOES NOT ADDRESS MAJOR ECONOMIC RISKS FROM COVID-19 PANDEMIC" (Ventures Africa, March 18, 2020) http://venturesafrica.com/cbn-policy response-does-not-address-major-economic-risks-from-covid-19-pandemic/ last accessed April 10, 2020

12. Hope Ashike, "Assessing CBN'S policies in containing impact of Coronavirus on economy" (BusinessDay, April 1, 2020) https://businessday.ng/banking/article/assessing-cbns-policies-in-containing-impact-of-coronavirus-on-economy/ last accessed on April 10, 2020

13. As low as $11 per barrel (in the United States) hitting its record lowest

14. FPRD/DIR/GEN/CIR/07/050

15. FPR/DIR/GEN/CIR/07/051

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