| By Roberts Orya |
Pull quote: 2016 might become a year that enhances opportunities amid challenges. While we recognise the challenges, including the stress in the foreign exchange market, we should not fail to embrace the opportunities, and support the efforts of the government to reflate the economy.
THE economics of what didn’t happen is not always appreciated; its value is also often disputed. Be that as it may, the country cannot be denied the sense of progress in 2015, in that we avoided a much-feared crisis aftermath to the general elections that held in the earlier part of the year. President Muhammadu Buhari has been magnanimous in acknowledging the role of his predecessor in this, and we have continued to see the President make determined efforts to salvage the country from the precarious economic situation.
We could hardly celebrate the peaceful transition of government, although the first transition of power from an incumbent candidate to the opposition candidate marked an important milestone in the development of the country’s democracy. Substantial drop in government revenue, on account of the sharp decline in the price of crude oil, imposed a harsh reality. This reality persists even as oil prices have fallen further since May 29th.
Oil revenue, which accounts for 70 per cent of government revenue and 90 per cent of exports, had tumbled from $110 per barrel in July 2014 to $50 in December that year; and it fell further to $36 at the end of 2015. This price shock has had greater severity than the oil price plunge in 2009 during the global financial crisis, and it is set to be the most persistent in decades. The fiscal dislocations attendant to the current oil price debacle is proving very serious for oil producing countries, more so where foreign reserves levels are low.
I have in the past three years focused my contributions to public economic policy discussions on how the country can complement oil revenue, especially foreign exchange income, by developing the non-oil sectors and their export potentials. This was not necessarily in anticipation of the substantial decline in the price of oil, or the oil wells drying up. In spite of its predictability, though, and over one year of downward trending, the fallen oil prices remain a rude awakening for producers across the spectrum of the market. This remains true, even if the responses we have seen from some of the producing countries are intensifying the supply glut which has been putting downward pressure on prices.
My view was informed by two mutually reinforcing realities. I lead an important state institution whose primary statutory responsibility is to promote Nigeria’s external trade by supporting export production. Nigerian Export – Import Bank (NEXIM Bank) is also officially designated as the Trade Policy Bank of the Federal Government. And on my job, my vision of the Nigerian economy that is so much larger than oil, both in revenue and aggregate production capacity, is continually magnified, either by discoveries from our market research efforts or the proposals that come to my desk.
Nigeria has one of the world’s richest reserves of arable land resources, huge unharnessed potentials for manufacturing, a wide range of solid minerals deposits in commercial quantity, and a large youthful population, whose innovation and dynamism can drive prosperity in the services sector. The question has been how do we translate the huge potentials into value-added domestic production and also serve the export markets.
One of the propositions I made was strong leadership. The topmost political leadership is important in creating an environment where government and market policies would be effective. Apart from the leadership role in effective resource governance, there is a body of evidence from emerging markets on how political governance was the turning point in economic performance. Chinese state-owned-enterprises have been functioning well even in international markets as an extension of a more effective state.
Whatever the imperfection that effective leadership accommodates, like human right violation and residual corruption challenges that some people allege with China, it does not nullify the capacity to bring about positive change, progressively. President Buhari provides the country a chance in both institutional and market transformation. The huge fiscal challenges the country faces may unduly influence public perception for now. Even at that, it is clear that the narrative on Nigeria about festering corruption is in the past; fiscal governance that is accountable and aims at welfare improvement is the present.
I have also shared the idea of fiscal and monetary interventions that are targeted at Small and Medium Scale Enterprises. SMEs are recognised as the engine for economic growth. They also provide the promise of innovations and adaptability that can harness export markets. NEXIM Bank, on its part, mainly supports SME manufacturers with potentials for export. Our aspiration is to grow our interventions to the scale of the foremost emerging market export credit agency. For instance, the EXIM Bank of India has been functioning as a quasi-sovereign lender to African countries, in efforts at opening foreign markets to Indian firms.
The importance of SMEs is also in the fact that they provide immense opportunities for job creation. As a percentage of output, SMEs create more jobs. SMEs account for 60 to 90 per cent of jobs in most OECD countries, including Japan and Spain. Even in the context of export production, the jobs are created locally. The mantra for US EXIM Bank is to finance U.S. export-related transactions in order to support U.S. jobs. But in terms of which sectors Nigeria can scale up productivity, exports and job creation over the longer term, NEXIM Bank has held up Manufacturing, Agro-processing, Solid Minerals and Services as encapsulated in our “MASS Agenda.”
Since assuming office, President Buhari has repeatedly recognised the agriculture value chain and the solid minerals sectors for direct intervention. This is quite astute. The most effective instrument for intervening in these sectors, based on their rudimentary levels of market development, is fiscal policy; and that is in the grasp of the Administration. Manufacturing and services should thrive on good policies that support market frameworks, including financing.
The current oil price slump might be a good psychological therapy for accelerating the pace of economic and export diversification for the country. But we are dealing with an issue that has long been identified. The solutions are in the most not new, as well. But this time around, a higher level of discipline and determination is required for us to achieve success, as the current circumstances are more challenging.
NEXIM Bank interacts with SMEs in these sectors all the time. They are the target of our export advisory services and risk-bearing facilities. We have recently been active in food processing where our interventions have financed over $100 million worth of exports in the last three years. However, at country level, the total financing support to SMEs has struggled to keep pace with the growing requirements of new enterprises and existing businesses needing the next round of growth funding. This explains why the various interventions have not made much leap in the aggregate impacts.
To address this conundrum, I more recently advised that the Development Finance Institutions should be co-opted on a larger scale. Africa’s regional DFIs – African Development Bank and African Export – Import Bank – can help scale up resources. Working with the national DFIs including NEXIM Bank, the critical channels for the transmission of financing interventions for SMEs growth would open wider. DFIs are specifically mandated to support enterprise development, focusing on the real sectors, and in the case of NEXIM Bank, export market development for the longer term. Commercial banks don’t necessarily have this orientation because of their capital structure and opportunities that deliver returns in the short-term.
The Central Bank of Nigeria is now more intent in addressing this channel issue. Its November Monetary Policy Committee meeting decided to incentivise real sector lending by releasing additional liquidity to banks who are willing to participate. Indications are that the national DFIs would also be more resourced.
So what is the big picture that is expected in 2016? I think 2016 can be the best year for SMEs in Nigeria. Their role would be better recognised, and their operations would be better supported. A key frontier of the support is the fiscal plan the government has unfolded in the 2016 budget. Part of it involves the much bigger capital expenditure which will increase business activities around infrastructure projects, including housing. A seemingly less appreciated part is how the poverty alleviation initiatives that puts money in the hands of the poor can boost patronage for SMEs.
2016 might become a year that enhances opportunities amid challenges. While we recognise the challenges, including the stress in the foreign exchange market, we should not fail to embrace the opportunities, and support the efforts of the government to reflate the economy. Here is wishing you all happy and prosperous 2016.
Roberts Orya is Managing Director and Chief Executive Officer, Nigerian Export – Import Bank. He is also the Honorary President, Global Network of Exim Banks and Development Finance Institutions (G-NEXID).
— Jan 4, 2016 @ 11:50 GMT