Asiwaju S. K. Onafowokan
11 May 2008
opinion
Lagos — The truth is that if the The truth is that if the private sector must really be the engine of growth and also complement the efforts of the public sector in the realisation of its developmental goals, the operating environment for business should be improved considerably and consistently.
In keeping with our style and practice, my presentation would cover macroeconomic matters, infrastructure issues, institutional challenges and sectoral concerns. Let me now proceed to address the specific issues.
A commendable feature of the Nigerian economy in recent years is the stability of the Naira exchange rate. We have even witnessed some significant appreciation of the Naira in the last one year. As you know, Nigeria is a major beneficiary of the rising global oil prices, being an oil producing country.
The funding of the foreign exchange market has therefore not been impeded in any way. Secondly, the growing investors' confidence in the Nigerian economy had boosted the inflow of foreign exchange into the economy. The quantum of foreign exchange inflows from Nigerians in Diaspora has also been on the increase. I should acknowledge the role of the monetary authorities (the CBN) in achieving and sustaining this stability through its constructive monetary policy management. The outlook for the rest of the year is that this stability will be sustained.
Interest Rate Development
Gentlemen of the press, a lot has been achieved in the Nigerian financial system since the commencement of the Banking sector reform in 2004. The stability of the financial system has improved, corporate governance standards have been enhanced, capacity of banks to fund bigger projects has increased, use of IT applications in service delivery has improved, and many more.
But curiously, we have not seen any notable reduction in the cost of funds in the economy. This is one big concern to us in the private sector. For most investors, cost of funds is still generally above 20%. This is not good enough for investment growth. It has also further perpetuated the short term disposition of investors in the economy. Long term investment cannot be sustainably funded at the current level of interest rate.
The credit conditions for SMEs are even much worse. They are faced with the challenge of higher cost of funds and the added constraint of access to credit. Most of them can not meet the collateral requirements of the banks. Yet, if we must harness the huge entrepreneurial potentials of our people, we need to construct credit policies that would boost private enterprise at the small and micro enterprises level.
Currently, most of the small businesses patronize the informal financial markets and finance companies where they pay interest rates which are sometimes as high as 80 to 100% per annum. Private enterprise growth in all advanced economies is driven principally by good credit conditions. We have noted the current initiatives on Micro Finance Banks which had been designed to deal with this challenge. We would continue to track developments in these institutions and offer suggestions as and when necessary. Meanwhile, we propose the following measures to bring down the current cost of funds and improve the access of SMEs to credit:
•There should be a Credit Guarantee Scheme in place to give cover to the SMEs. This idea was mooted by the CBN some years back but was not followed through. We suggest that the policy be revisited and urgently implemented. This will reduce the risk of lending by banks to SMEs and ultimately reduce the cost of funds (to SMEs) as well as improve their access to credit.
•With the recapitalization of the insurance companies, they are also now in a position to develop products that could be used as guarantees to secure credit from the banking system. This is the practice globally and our insurance firms should strive to meet this standard which would significantly enhance their relevance to private sector development.
•Public sector funds, specifically federal government capital allocations, should be released to the banking system at competitive deposit rates. This would boost the supply of loanable funds in the Banking system and considerably reduce the cost of funds. Keeping public sector funds outside the financial system is an unorthodox monetary policy practice and could trigger distortions in the economy. Government funds need to be reinjected into the economy to aid the principle of circular flow of income since a portion of the funds were drawn from the private sector in form of taxes in the first place.
We appreciate the concern of the monetary authorities about inflation and the possible pressures on the naira exchange rates as likely outcomes of releasing public sector funds to the financial system. But we reckon that the resultant income and output growth from a low interest rate regime would itself significantly moderate inflationary pressures. We cannot afford to underestimate the role of credit in driving investment growth, boosting output, creating jobs and alleviating poverty. If our foreign reserves of $60 billion could be kept in foreign banks, why can't our public sector funds be made available to our domestic banking system? Indeed, we expect that part of our foreign reserves should by now be kept with the domestic banks.
Inflation and Food Security
Gentlemen of the press, we are beginning to witness a trend of spiraling inflation. Official statistics indicate that inflation rose from 6.6% at the end of December 2007 to 8.6% in January 2008, but fell slightly to 8% in February this year. What is most disturbing in the current scenario is the skyrocketing food prices. And from all indications, there is a real possibility that the situation may get worse unless we act very quickly. Prices of some staple food products had gone up by between
President Musa Yar'Adua
20% to 100% within the first quarter. As you are perhaps aware, this development has both global and domestic dimensions some of which I shall review as follows:
•The increasing rush by the west to biofuel to reduce the impact of spiraling crude oil price had caused a significant diversion of grains into ethanol production. Indeed, many farmers worldwide have abandoned the production of other food items in favour of grains used for the production of ethanol.
•Escalation of transportation and production costs as a result of soaring energy cost.
•The incident of Global warming and inherent climatic change had caused a number of natural disasters such as desertification and flooding, reducing the size of arable land available for agricultural production.
I acknowledge and commend the recent intervention of the federal and state governments to deal with the food security challenge as follows:
•Waivers on import duty and levies on rice over the next 6 months.
•Provision of N10 billion credit for rice farmers to boost production at a subsidized interest rate of 4% and a repayment period of 15 years.
Asiwaju S.K Onafowokan is the President of Lagos Chamber of Commerce and Industry.
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