Refocusing The Single Digit Pricing For DFI Debate

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Tuesday, November 13, 2018   04.31PM / By Olufemi Awoyemi / RO

 

This is a very interesting debate. It is a fragment of the general debate about the efficacy of using subsidies to promote industrial and economic development.

 

The underlying asset or resource being subsidized must be properly defined as "industrial project" or "production/manufacturing" loans capable of having multiplier effects on the economy as opposed to loans for general trading, importation or services.

 

Unfortunately, DFIs account for less than two percent (2%) of the resources available for these priority loans. Because, as a country; we lost control of our financial services sector in the 1980s following the erroneous implementation of the IMF-recommended Structural Adjustment Programme (SAP). The privatized banks and the newly licensed privately-owned banks are not configured to focus nor do they care about industrial development.  They are all too happy to give short-term loans to commercial ventures and earn very good returns.

 

It is noteworthy that the International Monetary Fund (IMF) has acknowledged it was wrong in recommending SAP for developing countries. Somehow, developing countries haven't had the guts and balls to retrace their steps as was done by some Asian countries such as Malaysia and South Korea.

 

Given the above scenario, the Federal Government's options are grossly limited to the resources of its DFIs. There is need for careful prioritization in the selection of industrial projects to be funded by the limited resources available.

 

Unfortunately, this has now been made even more difficult by the funding structure of the newly established Development Bank of Nigeria (DBN), which received about USD1.3 billion in funding from World Bank (WB), African Development Bank (AfDB), the German KfW Development Bank, French Agency for Development (AFD) and European Investment Bank (EIB). These foreign parties are applying subtle pressure on DBN to charge higher interest rates on its loans.

 

Globally, DFI loans are given at subsidized interest rates. So it is ironic that the foreign DFIs invested in DBN, who themselves give subsidized interest loans in their home countries are preaching market rates in Nigeria.

 

The Nigerian government must decide whether it wants industrial development or not. If the answer is NO, interest subsidies should be abolished. But if the answer is YES, then by all means, we should retain interest rate subsidies. However, we must prioritize and be selective in the qualifying industrial projects.

 

 

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Post Script – Recalling Macro issues

I will quote Ayo Teriba  here on the issue:

“The oil price induced current account crisis is happening at a time the global economy is awash with liquidity and many of Nigeria’s emerging market peers are successfully attracting record levels of foreign direct investment and diaspora investment inflows. Nigeria should adopt immediate measures to join the ranks of these countries and attract investment inflows on its capital account to offset the export income lost on the current account because of the collapse in oil price. Saudi Arabia is currently pursuing this strategy by attracting the world’s attention to its non-oil investment opportunities. Nigeria is much better placed to do so than Saudi Arabia because Nigeria has a much bigger non-oil economy than Saudi Arabia, thereby offering much bigger non-oil investment prospects. A long and growing list of emerging markets is capitalizing on the global liquidity glut2 to attract and retain record levels of foreign investment inflows.

 

The most worrying fact about Nigeria’s external financial inflows is that two current account items, export revenue and diaspora remittances, are the only two significant sources of foreign exchange supply. Capital account inflows into Nigeria, in the form of direct investment and portfolio investment, are very weak. And this must be immediately redressed. In 2015, Nigeria’s exports were US$45.89 billion, while diaspora remittances were US$20.41 billion, compared to foreign direct investment of US$3.06 billion, and foreign portfolio investment of US$2.54 billion3. Such weakness in the capital account makes the oil price induced current account crisis more hurtful than it should have been in the presence of buffers from stronger capital inflows.

 

The way forward for Nigeria is to fix this weakness in the capital account by taking the following three measures: (i.) Break government monopoly that shuts foreign investment out; (ii.) Attract foreign investment to fix foreign exchange scarcity and infrastructure decay, through immediate IPOs on existing state-owned enterprises, and new licences for greenfield projects; (iii.) Engage the world about the future of the Nigerian economy.”

 

 

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References & Related News

1.       Development Bank of Nigeria PLC

2.      Central Bank of Nigeria:: Development Finance Activities

3.      CBN’s FAQ on Development Finance

4.      Nigeria Is Lagging Behind In The Race For Global Liquidity - Ayo Teriba Oct 13, 2018

5.      Development Bank provides N5bn loans to 20,000 SMEs – Daily Trust  Jul 09, 2018

6.      Why banks aren't lending at single digit interest rate – CBN – Punch ... July 13, 2018

7.      Single Digit Interest Rate For DFI's Is Neither Possible Nor Sustainable ...  Sept 24, 2018

8.     BoI to give MSMEs N250bn at s Sngle Digit Interest – Punch Newspapers  Jul 17, 2018

9.      Nigeria Is Lagging Behind In The Race For Global Liquidity - Ayo Teriba Oct 19, 2018

10.  MPC Treads Cautiously As Economic And Political Environment Remains Cumbersome Sept 26, 2018

11.   This Time Is Different: There Is A Clear Way Forward For The Nigerian Economy Sept 10, 2018

12.  Personal Statements By The MPC Members at The 120 MPC Meeting of Sep 24-25, 2018

13.  Interest Rate Hike in US, Hold in Nigeria: What Next? – FSDH Market Outlook

14.  Monetary Policy And Risk Management At A Time Of Low Inflation And Low Unemployment

15.   MPC: Winter Is Coming For The Nigerian Economy

16.  MPC Treads Cautiously As Economic And Political Environment Remains Cumbersome

17.   CBN Communiqué No. 120 of the MPC Meeting – Sep 24-25, 2018

18.  Nigeria Holds Rate at Record High as Price Pressures Mount


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