Global economy beyond oil: NEXIM Bank's perspectives on the challenges and solutions
The oil market has been quite volatile since the turn of the century, with oil price rising from about $28 per barrel in 2000 to a peak of $140pb in 2008, before declining in the wake of the global economic crisis. Oil price fell to about $42pb in 2009 before recovering again and reaching a peak of about $125pb in 2012.
The current decline which started at about mid-2014, has been attributed to weak global economic recovery and product oversupply, following the US shale oil programme. The current price downturn is expected to be quite protracted.
The global oil price decline has had mixed impact on the world economy. While oilimporting countries have benefited from lower operating costs, revenue decline in oil-exporting countries has impacted adversely on economic growth.
Data from the International Monetary Fund (IMF) shows major oil-producing countries have either slid into recession or experiencing declining growth. The IMF has advised that given that oil is an exhaustible resource, oil producing countries need to develop other sectors to take over as oil and gas resources dwindle.
In Nigeria, in spite of the increased diversification of the production base, Nigeria remained a mono-product economy, with the oil and gas sector contributing about 70% of government revenues and over 90% of export revenues.
The collapse of the global oil market in 2014, has triggered recessionary pressures in Nigeria, characterised by: 1). Lower government revenues with attendant budgetary pressures at various levels of government. 2). Decline in export revenues, which fell from $97.82bn in 2013 to $55.01bn in 2015, with further decline expected in 2016. 3). Deterioration of macro-economic variables with Naira exchange rate devaluation, rising inflation and higher interest rates.
The key lesson from the foregoing is that Nigeria must move away from the dominance of oil to ensure sustainable growth and development. Besides the problem of revenue volatility, the oil sector, being an enclave, is incapable of generating the required jobs to address the growing problem of unemployment – particularly among the youth.
Nigeria must therefore redouble its steps towards economic diversification by promoting increased production and exports in other key sectors, particularly agriculture, solid minerals and other sectors that have been identified as key drivers of economic growth.
To promote non-oil exports, there is the need to address some of the critical issues and challenges impacting the non-oil sector. There is the preponderance of only about six primary commodities, accounting for the bulk of exports from Nigeria over the last 5 years, out of the huge array of exportable products in the Agricultural, Solid Minerals and Services sectors. The primary products – Cocoa, Rubber, Leather, Shrimps/Fish and Cotton account for about 53% of non-oil exports. Aluminium/Carbonate accounts for 4.2% and the commodity is the 6th largest of the non-oil exports.
Huge informal trade, estimated annually at about US$12bn by Nigerian Export Promotion Council (NEPC), makes it impossible for many exporters to access finance and other export incentives to grow their businesses. There is also the issue of limited market access; Europe remains the key market for Nigerian non-oil exports, while exports within the African region remain below 15%.
Another major challenge of the non-oil export sector is access to credit. Data on sectoral distribution of loans by banks in the last seven years indicates that export loans peaked at N852bn in 2008, before declining to N795 billion in 2009, and has dropped consistently since then, reaching a low of N122 billion in 2014.
In percentage terms, loans to the export sector averaged only about 0.4% of the total Deposit Money Bank loans to the private sector over the last 5 years, which shows some correlation between the decline in non-oil sector loans and lower non-oil export revenue receipts. Besides the high cost of funds, Deposit Money Banks are generally unable to provide medium- to long-term funds needed to support the growth and development of the non-oil export sector.
As part of efforts to arrest the declining trend in non-oil export revenues and boost investments in the sector, the Central Bank of Nigeria (CBN) recently approved two funding schemes and appointed NEXIM Bank as the Fund Manager. The funds are the N500 billion Export Stimulation Facility (ESF) – Newly Introduced, which has tenor of up to 10 years for project finance facility inclusive of moratorium of 2 years. The ESF will also provide working capital/stocking loans, which shall be for a maximum tenor of one year with the option of roll-over not exceeding twice. Interest rates for loans
with up to three years tenor and loans for more than three years are capped at 7.5% and 9% per annum, respectively.
The other facility is the N50 billion Export Rediscounting & Refinancing Facility, which is an enhancement of existing N1.225 billion RRF being operated by NEXIM Bank from inception in 1991. The RRF is a window available to commercial banks for a maximum tenure of 360 days. Export bills or transactions shall be discounted or refinanced at an “all-in” rate of a maximum of 6% per annum, with NEXIM Bank allowed a maximum spread of 3%.
Other strategic initiatives of the Bank, which aim at facilitating trade and promoting non-oil exports, include the Regional Sealink Project. This is being facilitated by the Bank, in collaboration with the Federation of West African Chamber of Commerce & Industry (FEWACCI), the Nigerian Shippers Council & Transimex, to address the transport and logistics challenges impinging trade. NEXIM Bank is involved with the Borderless Alliance Initiatives. This is a regional partnership with the USAID West African Trade Hub, which aims at removing non-tariff barriers to trade through advocacy and information sharing.
NEXIM Bank is involved in the Creative & Entertainment Industry Intervention Programme, which the Bank developed to unlock the huge opportunities in the Creative & Entertainment Industry in Nigeria through funding and capacity building initiatives.
NEXIM Bank has recently been in a collaborative effort to introduce factoring in Nigeria. Factoring is a financial transaction involving purchase of receivables from an exporter with the “factor” assuming full credit and collection responsibility. Global factoring transaction in 2015 was €2.3 trillion, with Africa contributing only 0.7%. The major players in Africa are South Africa, Tunisia, Morocco, Egypt and Mauritius. Nigeria did not feature in the African Statistics.
NEXIM is therefore working towards developing factoring as an alternative trade finance instrument and MSME financial inclusion strategy in Nigeria. The Bank, in collaboration with the FSS 2020 Project Management Office, the relevant departments in CBN and other stakeholders are currently working to produce a draft Factoring Bill to enhance the development of this product in Nigeria. This is expected to contribute towards making Nigeria a major player in the African factoring market, which is expected to grow from €24 billion in 2012 to €90 billion in 2017.
NEXIM Bank is actively promoting the solid minerals sector. Collaborative arrangements are on-going with the Miners' Association of Nigeria and other stakeholders on how to mitigate the infrastructure gap to commence high volume exports on a sustainable and competitive basis. In this regard, we are pursuing arrangements to help realise the potentials of annual exports of about one million tonnes of coal, iron ore and lead/zinc using self-propelled and/or dry bulk cargo barges in the dredged inland waterways channels from Lokoja / Ajaokuta to Burutu Port, through the support of Nigeria Shippers' Council and Nigerian Inland Waterways Authority (NIWA). Partnership arrangements amongst Miners' Association of Nigeria, European Offtake Consortium being anchored by PWC Mining / Liebherr Group, Burutu Port Owners, Akewa Group and NEXIM / Sealink are on the verge of closure. And discussions with the Regional Sealink Project partners aim to extend the terms of the tripartite MOU to include provision of barges along the inland waterways to move both solid mineral products and other cargoes from Lokoja and Containerised cargoes to Lokoja.
Barges can be used on the navigable inland waterways to evacuate millions of tonnes of solid mineral products like iron ore, coal, columbite and lead/zinc amongst others, thereby bridging the infrastructure gap. The dredged waterways from Lokoja and Ajaokuta River Ports to Burutu Port can accommodate 5,000 to 10,000 tonnes barges, which is equivalent to 166 to 333 30-tonnnes trailers.
Furthermore, discussions are ongoing with the leather trade associations – Leather and Allied Products Association of Nigeria (LAPAN) and Association of Leather and Allied Industrialists of Nigeria (ALAIN) – on how to revamp and enhance higher value addition to the leather value chain. It is expected that the provision of funding support would have an immediate impact of enhancing exports of leather products through enhanced working capital funding and financial support to re-open or upgrade shutdown factories.
NEXIM Bank is also working with stakeholders on steps towards minimizing the problem of rejection of Nigeria's agricultural exports in Europe and other markets. In this regard, we are having discussions with major investors to resuscitate and commence the production of Jute Bags in the country for packaging of exports.
Given the current economic structure and resource endowment, Nigeria has the capacity to boost its non-oil revenues and promote sustainable inclusive growth and development. However, this will require concerted efforts by both the government and the private sector. The Nigerian Export-Import Bank is already working with other government agencies to address some of these challenges and boost support to the non-oil export sector.
The Bank has started to receive applications, under the new funding intervention schemes, and has so far processed requests in excess of N30 billion. NEXIM Bank, therefore, seeks and welcomes partnership opportunities with entrepreneurs and project promoters in identifying and funding viable projects, particularly in the areas of Manufacturing, Agro-processing, Solid Minerals & Services.
As part of efforts to arrest the declining trend in non-oil export revenues and boost investments in the sector, the Central Bank of Nigeria (CBN) recently approved two funding schemes and appointed NEXIM Bank as the Fund Manager.
This article was adapted from the presentation of Bashir Wali, Acting Managing Director / Chief Executive, Nigerian Export-Import Bank (NEXIM), at the 3rd Edition of Adegboyega Awomolo & Associates Annual Colloquium, which held on October 4, 2016 at Shehu Musa Yar'Adua Centre, Abuja.