CBN and the real sector question

The direct involvement of the Central Bank of Nigeria (CBN) in the real sector activities is a very controversial issue and different opinions exist about it. For instance, John Lithwack, World Bank lead economist thinks that it is not the core function of a Central Bank to have these additional programmes for say, the Small and Medium scale Enterprises, Agriculture etc, for stimulating economic activity.

He says Central Banks, rather than do this, use monetary policy instruments to affect real sector activities. But Litwack, on the other hand shares CBN’s unique pain that, unfortunately in Nigeria today, if the apex bank does not champion some of these economy stimulating programmes, it may not be done and its monetary efforts would suffer.

“My thinking is that perhaps, this is the reason why Sanusi believes that the Central Bank needs to take up these activities may be for the time being. I sympathise with the governor’s position, but I think that in general, it is not a good thing to have these kinds of programmes run by the Central Bank,” Lithwack tells BusinessDay.

There is often this talk about the CBN going beyond its core functions and delving into core activities and initiatives that would spur economic activity in the real sector, especially since Sanusi Lamido Sanusi, assumed office as the apex bank governor, some four years back.

Many hold the opinion that the Sanusi-led CBN has involved itself in too many initiatives and projects, some of which do not directly align with its mandate of basically maintaining price and financial stability in the country.

The proponents of this very side of the argument would prefer that the apex bank strictly concern itself with activities relating to ensuring monetary and price stability; issuing legal tender currency in Nigeria; maintaining external reserves to safeguard the international value of the legal tender currency; promoting a sound financial system in Nigeria; and acting as banker and provide economic and financial advice to the Federal Government.

No doubt, these are the core mandates of the Central Banks world over.

However, there is this other side of the argument that the Nigerian apex bank could temporarily take up other economic activities that could help the economy as long as such do not interfere with its core mandate.

Statutorily, the CBN was established to promote monetary and price stability, a sound financial system, and perform the core functions of currency management.

But the position of today’s CBN in a country where monetary policies are often challenged by activities or inactivity on the fiscal side is a very pitiable one.

This is basically because, like Sanusi often yells out in ‘frustration’, so much structural imbalance exists in the system that make it practically impossible for those monetary policies, no matter how well articulated, to achieve the desired effects in the economy.

For instance, no matter how low the CBN keeps rates, banks could still be averse to lending to the real sector if they are not convinced that the operating environment (like power, transport system, etc) are such that would support those businesses to grow and make enough profits and be able to repay whatever they borrow.

But the discourse here is not whether the apex bank should get deeply involved in all of these real sector activities, but whether, looking again at Nigeria’s peculiarities; whether such interventions, so far are making significant impact or have made any impact at all in the economy.

It should however be noted that due to Nigeria’s peculiarities as a developing nation, the CBN Act (2007) as amended, gave the apex bank some developmental functions through various intervention programmes to improve access to finance for real sector development.

CBN’s interventions take the form of collaborative programmes, schemes, institutions and policies with government, development partners and other private sector players. To ensure that these interventions are effectively implemented, the Development Finance Department of the apex bank was assigned the responsibility of carrying them out.

On assumption of office in 2009, Sanusi rolled out his four-pronged agenda that would guide activities in the CBN while he holds sway as the apex bank boss in his five-year tenure. The fourth of that agenda is to ensure that the financial sector contributes to the real economy basically through improvement in access to funding.

The real sector has been recognised as the engine of economic growth across different jurisdictions. However, in Nigeria, the sector has been disadvantaged with respect to sourcing financial resources competitively.

Some of the reasons for this relate to high operating costs, long payback period, and elevated risks of operation. Consequently, the CBN in collaboration with the Bankers’ Committee, are presently involved in a number developmental initiatives aimed at revamping the economy.

Some of these initiatives include the establishment of N200 billion Small and Medium Scale Enterprises Guaranteed Scheme (SMECGS) to provide credit to SMEs and establishment of Commercial Agricultural Credit Scheme (CACs) in collaboration with the Federal Ministry of Agriculture and Water Resources to finance agriculture value chain.

Others are the provision of N200 billion Refinancing and Restructuring Facility (RRF) to create credit and support for the development of the real sector and the establishment of N500 billion Power and Airline Intervention Fund (PAIF), a facility for investments in a debenture issued by the Bank of Industry (BOI).

These interventions were aimed at delivering credit at below market rates. There is also the Nigeria Incentive–based Risk Sharing System for Agricultural Lending (NIRSAL) and the Entrepreneurship Development Centres (EDCs) which recognise that youth unemployment constitutes a major social problem in the country.

Available figures show that most of these interventions have so far done quite a bit to contribute to the nation’s economic expansion even though huge challenges still remain.

For instance, the CBN in collaboration with the Ministry of Agriculture established the Commercial Agriculture Credit Scheme (CACS) in 2009 to finance large scale projects along the agricultural value chain. It is aimed at modernising the agricultural sector in the country.

The scheme commenced operations in April 2009 with the approval of the Presidency, Federal Ministry of Agriculture and Water Resources and the signing of an agreement at the roll out stage between the CBN and two selected participating banks- United Bank for Africa plc and First Bank plc.

Subsequently, five additional banks: Fidelity Bank plc, Guaranty Trust Bank plc, Union Bank Nigeria plc, Unity Bank plc and Zenith Bank were authorised to participate in the scheme and in January 2010, it was extended to all the 24 banks that scaled through the CBN’s banking reform exercise.

With a capital base of N200 billion, the scheme is being funded through the issuance of N200 billion, 3-year-tenored Federal Government of Nigeria Bond floated by the Debt Management Office (DMO) in September, 2009.

The objectives of the scheme are to fast-track the development of the agricultural sector of the economy by providing credit facilities to commercial agricultural enterprises at a single digit interest rate; enhance national food security by increasing food supply and effecting lower agricultural produce and product prices.

It was also conceived to help reduce the cost of credit in agricultural production to enable farmers explore the potentials of the sector, and increase output, generate employment, diversify the revenue base, increase foreign exchange earnings and provide input for the industrial sector on a sustainable basis.

Figures show that under the scheme, about N199.12 billion has been released to 19 Deposit Money Banks for 269 projects made up of 239 private projects which received N160.12 billion and thirty state governments and the FCT which accessed N39 billion from inception to December, 2012. The balance of CACS fund as at end-December, 2012 was N882 million.

A total of N16.83 billion had been repaid in respect of 33 expired facilities under the scheme as at end-December, 2012. In 2011, a total of 32,801 new jobs, made up of 2,417 skilled, 13,042 unskilled and 17,342 indirect jobs, were created by both the state governments and private sector. Also in 2012, CACS projects generated a total of 100,301 new jobs, made up of 362 skilled, 2,346 unskilled and 97,593 indirect jobs.