By NBF News

The banking sector has been the gauge of financial flow in the economy. It dominates over 65 per cent of activities in the Nigerian Stock exchange. The sector before now assumed the position of Nigeria's multinational or transnational corporations. For instance, as at the last count, the banking sector accounted for about 65 per cent of the capital market capitalistion of the Nigerian Stock Exchange (NSE).

About 90 per cent of the financial system assets are domiciled in the sector, while the private sector credit of about N8.12 trillion as at February 2009 was more than the combined spending by the three tiers of government.

The Central Bank Governor Mallam Sanusi Lamido Sanusi had revealed at a book launch last year that in 2009, the federal and state governments are expected to borrow about N1.6 trillion, the bulk of which was to come from the banking sector. In addition, non-deficit budget of the 2009 federal government segment of the national budget is less than the banks' total capital. ''In effect, this means that in the event of any crisis in the banking sector, the entire budget of the Federal Government cannot bail out or recapitalize the banks.''

Today, the story is different and dangerous, as loses recorded by the banks have left the industry at the mercy of the government especially through the injection of N620 billion into the rescued banks. The government itself is battling other economic challenges and considering a deadline for banks to return the bailout fund. It should be recalled that in compliance to the regulators' directive, the eight rescued banks made huge provisions and therefore losses.

For instance, Intercontinental bank's provision for bad loans stood at N434 billion, with a loss of N328 billion as at 30th September 2009. Wema bank provided N116 billion and loss of N29 billion. Bank PHB made provision for bad loans of N232 and loss of N338 billion for the period (covering 15 months). Oceanic bank provided about N315 billion for bad loans and N286 billion loss. Finbank made provision for bad loans of N95 billion and loss of N121billion while Spring bank's provision for bad debt stood in the region of N123.3 billion and loss of N163 billion. In the same trend, Afribank made provision for bad loan of N84 billion and loss of N71 billion. Union bank's provision for bad loan was N148 billion while its loss stood at N223 billion: all totalling N1.5 trillion losses.

More worrisome is the fact that the 2010 budget deficit is also estimated to be in the region of the same N1.5 trillion. What an equation. The only hope of financing the government deficit if Oil prices remain at its low ebb is through the domestic bond market which some analysts have repeatedly warned of possible default by issuers. This is fuelled by threats of inflation and the submission by the head of macroeconomics and regional head of research Africa, at the Standard Chartered bank Razia Khan, who warned that the country cannot afford continued high FAAC allocations, with the excess crude account, now standing at under US$ 3 billion. Similarly, the hope of saving the banks lies in fast-tracking the Asset Management Company (AMC), which modalities are not yet clear.

After due consideration of the Appropriation Bill, the National Assembly approved N4.6 trillion initially, which president Goodluck Jonathan accented to, making it the highest budget in the nation's history. More striking is the fact that its deficit of N1.5 trillion out of which the senate would be spending about N15 billion as sitting allowance and another N270 million for retreats is has been adjudged ambitious by analysts. It also made provision of N200 million for the rehabilitation and furnishing of the houses of 10 principal officers of the presidency and an additional N100 million for IT installations in the president's office.

Although the 2010 Budget has been cut from the NGN 4.6trn initially proposed to NGN 4.2trillion, a supplementary budget of N 639.8billion has also been proposed. The president presented a supplementary budget of N639.824, 478,183 out of which N507, 125,967,248 is for additional recurrent non-debt expenditure while the balance of N132, 698,519,936 is for contribution to the development fund for additional capital expenditure. Federal Government retained revenue from N3086.71 billion to N2433.03 billion; total government's spending from N4.637 billion to N4.206 billion while deficit financing from 2010 fiscal year was reduced from N1,550.80 billion to N1772.63 billion..

With banks understandably reluctant to lend following the record write-down of losses last year, much of the excess liquidity created has found its way into FGN bonds. However, following the recent market dislocation and the selloff in bonds, unrealised losses at Nigerian financial institutions were estimated by Reuters to be in the region of US$ 1bn (losses are unrealised as there is no obligation to mark-to-market if bonds are held to maturity). Yields have now largely corrected, but the risks were made clear. According to Khan, any rise in inflation that might prompt a meaningful tightening of monetary policy in Nigeria would therefore pose some risk to Nigeria's financial sector. Provisioning across the banking sector in the last year has taken their toll. Banks are risk averse and still cautious about new private-sector exposure .Currently, with markets already flush with liquidity, there is minimal borrowing from the Standing Lending Facility - the CBN's discount window. The increase in liquidity is inflationary if no investment out left is open.

The CBN has put in place a number of remedial measures aimed at boosting credit growth but prior to full resolution of the banking sector crisis, availability of credit may continue to have a dampening effect on growth in the economy. To appreciate the risks posed by the anticipated increase in money supply in the months ahead, it is important to understand the drivers of Nigerian inflation. The CPI basket is dominated by food, with food and non-alcoholic beverages combined making up 64.4per cent of the basket. Given this, the link between money supply growth and inflation, as officially reported, is often tenuous.