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Fiscal, Monetary and Economic Policy and The Impact on Capital Formation

Proshare

Monday, March 20, 2017  04:22PM / Proshare Research

Being a presentation at the Small and Medium Enterprise Development Agency of Nigeria (SMEDAN) and The Hudson Group organised National Strategy Session held on March 20, 2017 at The Wheatbaker Hotel on Enterprise Development Solution.


Enterprises are referred to as growth clusters, which form part of the micro end and  a subset of the macro economy.

Enterprises are not immune from cyclical shock because they are components of that particular economy.

The present reality of a shrinking macro economy has rippling adverse effect on the development of small and medium enterprise in Nigeria.

For instance small enterprises are burdened with rising fixed cost and a relatively weak demand, forcing them into a volatile net cash flow episode. Capital famine has emerged due to downturn effects on the economy, which has made capital formation slack. We must clear the air on this?  History has shown recessionary effects exclude small firms from the reach of capital. At the same time enterprises find it easier to adjust to cyclical downturn than larger firms due to their size.

A paradox where the later is in desperate need of a smaller size to regain mobility and retain it is existence. On the other hand small and medium firms have always retained their mobility but a more severe headache of capital crunch will linger on. It must be noted that small and medium firms has been experiencing surfeit capital even in period of boom. It only grew worse during a recession.

Therefore in a period of both high marginal compression and magnifying leverage risk, how best can fiscal and monetary policy provide the right pills to alleviate such headaches? 

Human vs. Financial Capital
Capital consists of both human and financial capital. Human capital is the collective skill, knowledge or other intangible assets of  an individual that can be used to create economic value.  A deficient human capital affects the formation and effective use of capital. Eventually the development of enterprise is either slow or retarded. In a society where the right skills are available and a proper knowledge, supply following finance thrives. 

The kind of policy direction with regards to capital formation is broadened.  Gross profit is a measure of how entrepreneurs or the management make use of the available resources at their disposal. Therefore the prudent management of financial capital is dependent on human capital. That is why nations like Israel and Poland, which has put substantial emphasis on human capital: end up having strong enterprise development.

Therefore Nigeria must put more premiums on human capital, in order to achieve enterprise development. The reality is that human capital creates the right environment and eventually put money to work: money cannot think for itself nor act on his own. The ability of Small and medium enterprise to evolve and improve its national competitiveness depends on the quality of its human capital e.g. India. Enterprise development cannot be possible without a vast quality of human capital.     

Monetary Policy
A large chunk of small and medium enterprise still resides in the informal sector. For Small and medium enterprise to benefit from capital formation, it has to move from the   informal sector to the   formal one: their chance of accessing credit while still in the informal sector is slim.


Over the years monetary policy has been largely restrictive which, has affected the health of enterprise development in Nigeria. High interest rate rooted in a policy aimed towards positive real positive interest rate has created a narrow credit channel: Which has reduced the ability of SME to access credit due. In most climes where SME has enjoyed a robust development, the catalyst has been single digit e.g. china, Malaysia and Thailand.

Therefore for small and medium enterprise to develop, a reduction in rate is needed so as to support their growth. Most importantly a selection of specific sectors which have large concentration of Small and medium will become the targeted focus. 

A policy directive that will ensure banks lend more to small and medium enterprises cannot be ignored. Furthermore the monetary end can provide some incentives to bank to encourage them to lend to Small and Medium enterprise. In some circumstances the central bank can accommodate more liquidity in the system or reduce the fractional requirement expected from banks. Such tolerance is aimed at improving the accessibility of credit by Small and medium enterprises.

In certain climes a fund pool is created with an understanding between the monetary authorities and deposit money Banks. Such fund is created solely for Small and medium enterprises and it is also charged at a low rate and expected to run for a specific period of time.  The idea is to protect them from been bullied or muscled out by large firms.

Fiscal and Economic Policy 
Earlier we referred to small and medium enterprises as growth clusters but the optimality of such growth clusters can only be achieved: when they are intergraded into the broader national developmental plan.

More importantly small and medium enterprise has continued to bear high structural cost, which is depleting their profit. Therefore proper macro policies must be put in place, such as infrastructural up grade.

The growing structural cost has widened the capital indifference to small and medium enterprise. Capital formation is harder to achieve when there is a burgeoning structural cost: creditors find it harder to put value on risk. 

More importantly micro economic conditions which simplify laws such as property and legal rights provide the needed leverage for small and medium enterprise to access credit.

Many medium enterprises have had their growth stunted suddenly due to poor microeconomic policy.  The fiscal side must retool its tax’s policy to incubate growth among small and medium enterprises, providing them both incentives and waivers when necessary.

While for sectors where there are product have a relatively short life span, some form of cover should be provided e.g. agriculture. Lastly developmental banks must achieve an alignment in such a manner that they address capital deficiency to small and medium enterprise from a strategic point.

They most highlight more on sectors which provide competitive advantage, avoid duplicity and partner with Nigeria export promotion council. Developmental banks must drive small and medium enterprise beyond providing just any kind of value but the right kind of value that will lead growth.   



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