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Nigeria has reset export financing policy with two funding tools 12 Jul 2016

As the steep decline in the global prices of oil took its toll on oil exporting countries, international development experts called for national development policies to attenuate the commodity price shocks. Among some of its several policy responses, the Central Bank of Nigeria (CBN) is working in partnership with the country's Development Finance Institutions (DFIs) having recognised the important role DFIs play in promoting structural transformation.
    
The short-term challenges of lower reserve buffers, negative output growth and inflationary pressures have not masked the dynamism of the Nigerian economy, which still remains the largest in Africa by a wide margin. Notwithstanding, these challenges present an opportunity to put Nigeria on the path of economic diversification and structural transformation. There would be no better time to get this done than in this current administration of President Muhammadu Buhari who has shown the  political will for fiscal discipline.

The important thing about the policy responses underway in Nigeria – and this must be emphasised – is that they are not short-term fixes. For instance, the policy on diversification in exports and domestic production is long overdue. For too long, Nigeria has been considered to be a Commodity Dependent Developing Country (CDDC) because her commodity export revenues contribute to more than 90 per cent of its total export earnings. Indeed, this is the bane of many African countries who constitute half of CDDC countries in the world, according to United Nations Conference on Trade and Development (UNCTAD).

In its latest Regional Economic Outlook for Sub-Saharan Africa, the International Monetary Fund attributed weakening growth in the region to the decline in commodity prices and tighter financing conditions that have put the economies under strain. But despite the bogie of low oil prices, the impact of the shocks has varied across countries, depending on the proportion of a country's exports that is primary commodities. For instance, Mexico, Indonesia, and Nigeria – which constitute the MINT economies, along with Turkey – are large oil exporters. However, in this group of economies that are considered to be the next big thing among the emerging markets, Nigeria has been the most hit by the oil price decline, as the country's total exports fell by 51 per cent from $102.9 billion in 2014 to $50.9 billion in 2015, according to the International Trade Centre (ITC), the joint agency of the World Trade Organization and the United Nations. Meanwhile, the other MINT economies had much lower declines in the value of their exports – the least hit being Mexico at 4 per cent because of the disproportionately smaller share of primary commodities in its total exports.

Export competiveness

Improving the competitiveness of Nigeria's non-oil exports is a key focus of Nigeria's trade policy. This policy has received a significant boost with the N500 billion Non-Oil Export Stimulation Facility (ESF) recently launched by the CBN, and managed by Nigerian Export-Import Bank (NEXIM Bank). The apex bank also expanded the Export Credit Rediscounting and Refinancing Facility (RRF) by N50 billion as a liquidity window to encourage Deposit Money Banks (DMBs) to provide export credit. The facilities are designed to address trade policy issues affecting the ability of Nigerian export-oriented companies to integrate in regional and global value chains.

As the Nigerian Government's official trade policy bank – with a key role in implementing these interventions – NEXIM Bank recently organised a press briefing in Lagos last month to announce the commencement of the two facilities. During the press conference, NEXIM Bank's Acting Managing Director/CEO, Bashir M. Wali, said improved export financing for exporters will enable them to upscale and expand their businesses and improve their competiveness.

A strong and vibrant Nigerian economy is one that has globally competitive firms that are producing value-added goods and services not only to meet domestic demand but also for exports. A sustainable Nigerian economy is one that is creating jobs, raising incomes and offering social protection, especially for women, young people, and poor communities. The CBN's partnership with NEXIM Bank will unclog what has been a bottleneck for a long time, namely, access to low interest (single digit) rate credit to the non-oil sector and enable companies in this sector connect to international markets for trade and investment.

Access to export credit

The share of credit to non-oil export-oriented companies shrunk to less than one per cent last year. The CBN said inadequate financing was responsible for the drop in non-oil export revenues from $10.53 billion in 2014 to $4.39 billion in 2015. As a matter of fact, a report the apex bank recently presented at a Bankers' Committee meeting shows that the liquidity conditions in the banking sector have been generally constricted.

This is not to say that the soundness of the Nigerian banking sector is in question. To be sure, Capital Adequacy Ratio (CAR) of the sector is at 16.5 per cent, well above the prudential minimum of 10 per cent. What reasonably concerns the CBN is the drop in total deposits in the DMBs, which fell 5.6 per cent between April 2015 and April 2016 and the Non-Performing Loans (NPL) ratio that rose above the prudential limit of 5 per cent to 10.1 per cent in the same period. These challenges cascaded to impair the financial intermediation role of the banks over the last one year as gross credit to the private and public sector declined by N41 billion or 0.3 per cent between April 2015 and April of this year.

Export-oriented companies face considerable financing needs, including procurement of raw materials, plants and machineries, spare parts, packaging materials as well as working capital. Other requirements entail making provision for export-value chain support such as warehousing, quality assurance and technology upgrade. Because a lot of the companies are unable to substantially meet these requirements, their capacity utilization remains low. This inevitably impacts on productivity growth for the sectors in which they operate.   

Perhaps this is the reason Nigeria's share of world exports over the last five years peaked at 0.8 per cent in 2012 and has since steadily declined, recording 0.3 per cent in 2015. In ITC's ranking of world exporting countries, South Africa, a smaller economy than Nigeria was ranked 37th in 2015, while Nigeria was ranked 49th. Also, Nigeria's share of exports to GDP at 18.4 per cent is lower than the contribution of exports to the GDP of peer frontier and emerging countries.

But there is now a policy reset in Nigeria to facilitate the economic diversification agenda of the government and promote the growth of non-oil exports, create jobs, boost revenue generation and achieve sustainable economic development. The N500 billion ESF and the expansion of the RRF by N50 billion also has the objective of ensuring Nigerian export-oriented companies meet their obligations to international clients, thereby enhancing the export relationship.
Critical impacts

Investment facilitation: A key element of these interventions is also to bring about a much-needed improvement in the business environment. Access to medium- to long-term competitive export financing at single digit interest rate (ranging from 7-9 per cent), will stimulate private sector growth, encourage foreign investment and job-creation. Through trade and investment, Nigeria can benefit from technology transfer or the uptake of new technology that will enhance Total Factor Productivity (TFP), the measure of industry-level efficiency.
    
Value-added products: The ESF and RRF are strategic financing partnership tools to move Nigeria to the higher end of the global industrial value chain. Growth of Nigerian exports would be driven by increasing the composition of value-added products. Put differently, the attractiveness of Nigerian exports will be determined by the level of sophistication of our main exports. NEXIM Bank is working with its clients to help the diversification of their export products and markets. The non-oil export stimulating facilities also come at a time when Nigeria's key trade partner, the United Kingdom, has elected to leave the European Union, the world's largest single market. Regardless of the fallouts of this decision, Nigeria-UK relations will remain strong; and even stronger if Nigeria increases its trade competiveness.

Social impact: As development financing tools, the social impact of these interventions in terms of creating sustainable employment and gender balance in employment will also be measured. In due course, Nigeria will be a veritable case study for effective development financing because of this policy response that the CBN and NEXIM Bank have commenced.