Economic Issues
Two Funding Tools To Reset Nigeria’s Export Financing Policy -By Chinedu Moghalu
Chinedu Moghalu
As the steep decline in global oil prices continues to take its toll on oil exporting countries, international development experts call for national development policies to attenuate the commodity price shocks.
The Central Bank of Nigeria (CBN) is working with Development Finance Institutions (DFIs) to promote structural transformation among some of its policy responses.
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.
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, which has shown the political will for fiscal discipline.
The policy responses underway in Nigeria 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 more than 90 percent of 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 (IMF) 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 these economies considered the next big things among the emerging markets, Nigeria has been the most hit by the oil price decline, as the country’s total exports fell by 51 percent 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 Organisation 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 four percent because of the disproportionately smaller share of primary commodities in its total exports.
Export Competitiveness
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 CBN 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, NEXIM Bank’s acting Managing Director/CEO, Bashir Wali, recently announced the commencement of the two facilities to improve export financing to enable exporters upscale and expand their businesses and improve their competitiveness.
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 export.
A sustainable Nigerian economy is one that is creating jobs, raising incomes and offering social protection, especially for women, young people, and poor communities.
Access To Export Credit
The share of credit to non-oil export-oriented companies shrunk to less than one percent 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.
The CBN said recently at a Bankers’ Committee meeting 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 percent, well above the prudential minimum of 10 percent.
What reasonably concerns the CBN is the drop in total deposits in the DMBs, which fell 5.6 percent between April 2015 and April 2016 and the Non-Performing Loans (NPL) ratio that rose above the prudential limit of 5 percent to 10.1 percent 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 sectors declined by N41 billion or 0.3 percent between April 2015 and April 2016.
Export-oriented companies face considerable financing needs, including for the 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 utilisation remains low. This inevitably impacts on productivity growth for the sectors in which they operate.
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 percent 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 percent) 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.
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.
Chinedu Moghalu is the Head of Corporate Communication at Nigerian Export-Import Bank.
