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Tuesday, 2 April 2013

IMF recommends AMCON’s liquidation to curb moral hazard

The International Monetary Fund (IMF) has called for the liquidation of the Asset Management Company of Nigeria (AMCON) in order to curb moral hazard and fiscal risks. The recommendation is contained in the Bretton Woods institution’s assessment of the country, after its 2012 Article IV consultations.
The directors of the Fund unanimously agreed that the continued operations of AMCON may wittingly and unwittingly increase instances of moral hazards and fuel fiscal risks. In economic theory, a moral hazard is a situation where a party will have a tendency to take risks because the costs that it could incur will not be felt by the party taking the risk. In other words, it is a tendency which encourages banks to take risks, knowing that the potential costs or burdens of taking such risks will be borne, in whole or in part, by others, in this case AMCON.
The IMF directors while commending the authorities’ success in restoring financial stability after the 2009 banking crisis, recommended the winding down of the operations of the asset management company to curb moral hazard and fiscal risks, in order to consolidate on the achievements so far.
They particularly welcomed the Central Bank’s commitment to address supervisory and regulatory gaps identified in the Financial Stability Assessment Update, particularly the need to strengthen cross-border supervision and the regime against money laundering and terrorism financing.
AMCON was set up by the Central Bank of Nigeria (CBN) as part of the efforts in restoring financial stability after the 2009 banking crisis. It was established in July 2010 specifically for the purpose of efficiently resolving the non-performing loan assets of banks in Nigeria.
The asset management company has bought over N5 trillion of these bad loans, which has freed most of the deposit banks to start lending again. BusinessDay investigations revealed that there is an increase in risk asset creation, which may have informed AMCON announcing that it would no longer purchase non performing loans from banks in 2013.
“No more non-performing loan purchases,” Mustafa Chike-Obi, CEO of AMCON told Business Day.
For most analysts, the banking sector resolution process seems to be largely complete, with AMCON said to have purchased non-performing loans (NPLs) for over N5 trillion at the rate of over N2 trillion.
This may have influenced IMF calling for the liquidation of the company.
On the macroeconomic front, IMF commended the authorities for prudent macroeconomic policies that have underpinned a strong economic performance in recent years.
Looking ahead, they agreed “that widespread unemployment and poverty remain key challenges for policymakers, and called for renewed efforts to make economic growth more broad-based and inclusive.”
They also supported the authorities’ strategy of consolidating the fiscal position while opening up policy space for needed investment in infrastructure and human capital.
To this end, they recommended the need to improve tax administration, better prioritise public expenditure, strengthen public financial management, and improve the fiscal framework. Particular, they encouraged the authorities to reduce poorly-targeted fuel subsidies, adopt a rule to set the reference oil price in the budget, and fully operationalise the Sovereign Wealth Fund as soon as possible.

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