At its July MPC meeting, the CBN stressed the need to channel long term capital to the real sector through the Real Sector Support Facility (RSSF)
There are four things of strategic importance which are lacking largely in most African economies and have resulted in the retardation of growth and development and prevalence of poverty in the vastly endowed continent. They are, industrialization, “agriculture miracle”, robust financial systems and inspiring leadership. Industrialization is the key driver of modernization and development. It helps to improve the living condition of the people. But it has been noted that there is little industry in Africa – the continent has failed to industrialize in the twenty five years since the first African Industrialization Day.
Also, the “agriculture miracle” which transformed other developing countries has not been witnessed in Africa even as African financial markets lack depth and breadth, without creative financing mechanisms and developed capital markets. Above all, leadership in Africa has not been inspiring, and grossly short changed development and raped the people.
Effective leadership results in productivity and positive change. Lee Kuan Yew transformed Singapore and has become a case study in leadership. Gandhi challenged India when he announced that if India could not clothe its citizens by producing needed textiles locally they should all go naked. India transformed to become a super power in textile manufacturing. It is the same for most East Asian countries – the Asian Tigers which emerged through inspiring leadership to be reckoned with in the global economy.
The narrative is different for Africa, thus the high rate of poverty and low Human Development Indices (HDI) that are pervasive in the continent. It has been reported that Africa is the poorest continent on the planet and half of the African population live in poverty. The rate of poverty in Nigeria is 62.60 pecent with about 100 million people living below US$1 per day. The misery Index is 48 percent, ranking Nigeria as the fourth on the global index according to the National Bureau of Statistics (NBS).
Nigeria’s population growth rate outstrips economic growth. And it has been projected that the population will hit 234 million in 2025 at a cumulative average growth rate (CAGR) of 2.5 percent which poses a threat to national security vis-à-vis unemployment rate and youth unemployment.
Nigeria’s high rate of poverty has been linked to petrodollar. The country has been over dependent on oil, but it has been postulated that no country becomes rich by exporting raw materials without an industrial sector. Experts have noted that Nigeria had a good head start in the beginning with a robust plan towards industrialization but lost the trajectory because of petrodollar.
The economy needs to be redirected based on knowledge and understanding of economic dynamics, creative strategies and political will. Four key sectors which constitute the dynamics of an economy are the financial, fiscal/government, external and real sector. The financial sector is the lifeblood of the economy which channel funds from surplus to deficit ends.
A robust financial system ensures stable macroeconomy which enables businesses to plan conveniently, and helps to attract foreign capital. Though Nigeria’s financial system has undergone transformational changes which enhanced the landscape, there is need to evolve more creative financing mechanisms and optimally utilize the instrumentality of the capital market to close financing gaps and catalyze industrial growth faster for greater job opportunities.
The fiscal/government ensures enabling environment and macroeconomic stability by sustaining aggregate demand which also enable economic agents to plan with confidence. The fiscal authority may need to harmonize and synergize more with the monetary authority for quantum leap developments in the economy.
The external sector interacts with economies of the other countries as in exports and imports. Nigeria as an import-dependent economy is disadvantaged in this regard because of unbridled importation. We import virtually everything such that we have been described as the ‘’junk yard’’ of the world. Unbridled importation creates jobs abroad to our detriment.
The real sector is the engine and driving force of the economy. It comprises manufacturing and agriculture where goods and services are produced through the combined utilization of raw materials and other production factors such as labour, land and capital. The key to industrialization is a combination of robust financial system (encapsulating creative financing mechanisms and optimal utilization of the capital market), and well funded and vibrant real sector, all things being equal.
At its July 2018 Monetary Policy Committee (MPC) meeting, the Central Bank of Nigeria stressed the need to channel greater and long term capital flow to the real sector of the economy through the Real Sector Support Facility (RSSF) and Corporate Bonds (CBs) to encourage local manufacturing, bolster economic recovery and stimulate growth and reduce poverty. The RSSF would be for the financing of Greenfield (new) and Brownfield (new/expansion) projects in the manufacturing and agriculture sectors only, and such projects would have high local content, foreign exchange earnings, potential for job creation and import substitution among others. Trading activities and refinancing of existing projects are prohibited from accessing the facility.
The RSSF would be accessed through the Cash Reserve Requirement (CRR) of deposit money banks at an all inclusive interest rate of 9 percent per annum. Cash Reserve Requirement is ‘’a specified fraction of the total deposit of customers which commercial banks have to hold as reserves either in cash or as deposits with the central bank.’’ It is one of the monetary tools used to regulate money supply in the financial system to avoid banks from overextending themselves so they would not create a knock on effect on other over extended banks.
The Real Sector Support Facility has been commended as a creative initiative which will trigger credit flow to the real sector to impact growth. Though some economy watchers have noted that CBN would have crashed the interest rate holistically for all sectors of the economy, but it is believed that the apex bank adopted the targeted action approach for strategic reasons. Some experts have noted that it would be dangerous to crash interest rate and create easy money ahead of election time because it would turn expansive in the short-run and trigger long-run inflationary consequences – a development most central banks dread.
The objectives of the RSSF and CBs are in line with some other policies of CBN such as the exclusion of 41 items from interbank foreign exchange market which are, to reduce unbridled importation, conserve foreign reserves, encourage local manufacturing, achieve self-sufficiency, create more jobs, reduce poverty and redirect the economy towards industrialization, all things being equal.