CBN’s PPP and FX Constraint in Manufacturing

Without doubt, infrastructural deficiency, lack of access to finance including foreign exchange as well as frailties in government business/investment policies had wreaked havoc on the country’s thriving manufacturing sector.

The country’s over-reliance on oil at the expense of economic diversification had largely been blamed for Nigeria’s present economic predicament, which had led to endemic challenges in power and infrastructure development.

Specifically, the neglect of agriculture which used to be a huge source of foreign exchange inflows through export of various cash crops is believed to be one of the biggest undoing for the economy – a situation which had seen the country grapple with increasing FX constraints in recent times- occasioned by volatility in the global oil price among others.

Lack of Competitiveness

Following the development, Nigerian companies had been rendered uncompetitive on the regional and global stage, and its exports potential greatly dwindled by lack of commitment by the government to empower the stakeholders and actors involved in the value chain.

Sadly, one of the high points of the neglect of the export sector was the sheer rejection of Nigerian agricultural commodities by the international community for allegedly falling short of standards.

But this is not especially surprising given that until now; the real sector had been neglected over the years and deprived of the needed funding to bounce back.

Thanks to the various efforts by the CBN to boost support for the manufacturing and export sector, there is renewed hope for the economy.

The CBN had observed the improvement in lending to the real sector following the introduction of the Loans-to-Deposit Ratio (LDR) in 2019.

Accordingly, industry gross credit increased by N6.63 trillion from N15.57 trillion at end-May, 2019 to N22.20 trillion at end-July, 2021.

The credit growth was largely recorded in manufacturing, oil and gas and agriculture sectors.

It is further argued that the current controversy over the value of the Naira against the US dollar is a direct consequence of the levity on the part of successive administrations to truly diversify the base of the economy.

SAP Programme

As aptly summarised recently by the CBN Governor, Mr. Godwin Emefiele, the current challenges with the country’s exchange rate started since the advent of the International Monetary Fund (IMF) led Structural Adjustment Programme (SAP) in 1986, and the introduction of the Second Tier Foreign Exchange (SFEM) market, adding that the local currency had been on a one-way free fall from parity to the US Dollar in 1984 to over N410/USD today.

He said about 35 years later, Nigeria had not been able to achieve the many promises and objectives of that programme, adding, “instead, what we have seen is widespread import dependency, which have wiped out most of our production and manufacturing bases and exported all our jobs in the process.

“What has happened to the massive textile factories across our nation such that we import almost all cotton products when we are rich in cotton? What has happened to our vehicle assembly plants across the nation such that we import most vehicles and have become a massive dumping ground for dying second-hand vehicles?

“What has happened to our rubber plantations through which we made the best tyres and rubber products in the world? What has happened to our groundnut pyramids? What has happened to our Cocoa farms? What has happened to our palm oil mills?” he queried.

Emefiele insisted that under the leadership of President Muhammadu Buhari, the country must stop the current decline for good.

He said, “We must return to massive home-made production; we must get our people working again. We must create the economic environment for massive domestic production and significant non-oil exports.”

Local Manufacturing

He said the country must return to an employment-led growth anchored on productivity and rewarding producers of local goods, services, innovation and new technologies.

He added, ‘If you consume cheap imports and export our jobs, we will make you pay dearly; but if you produce locally – with little or no foreign inputs beyond machinery, we will support you, and the markets will reward you abundantly.”

But the advent of the COVID-19 pandemic further exposed the underbelly weaknesses of Africa’s largest economy.

Against falling oil prices and dwindling external reserves, there had been concerns over the ability of manufacturers to access FX to meet their import obligations.

The central bank continued to assure the investing public that it was ready to meet genuine FX demands by manufacturers.

Additionally, the real sector had been constrained by high borrowing costs with its associated economic implications.

However, determined to arrest the situation and put the economy on the right trajectory once again, by boosting local output and encouraging exports of particularly non-oil commodities, the CBN governor recently unveiled a new financial instrument titled, “The 100 for 100 PPP – Policy on Production and Productivity” which he said would boost support for selected private sector companies in the country.

The initiative announced during the launch of the Central Bank Digital Currency (CBDC), known as the eNaira, further complements efforts by the apex bank to boost credit to the real sector.

Emefiele described it as the best and most sustainable way to address the Naira’s value – whether in hard currency or digital eNaira – through production, production and more production.

According to him, the new policy initiative anchored in the CBN Development Finance Department under his direct supervision, seeks to advertise, screen, scrutinise and financially support 100 targeted private sector companies in 100 days, beginning from November 1, 2021, and rolling over every 100 days with new set of 100 companies, whose names will be published in national dailies for Nigerians to verify and confirm.

He said, “After these 100 projects by companies in the first hundred days from November 1, we will take the next 100 companies/projects for another 100 days beginning February 1, 2022, and then another 100 companies for another 100 days beginning from May 1, 2022.”

Accessing Financing

In total, about 300 companies will have a rare opportunity to access needed financing to meet their operational objectives.

The CBN Governor said, “Working through banks, the financial instrument will be available to their customers in critical areas to boost the production and productivity and to immediately transform and jumpstart the productive base of the economy.

He explained that the purpose of the instrument was to take further steps to reverse the country’s over reliance on imports, pointing out that the country cannot afford to waste its reserves on cheap imports and currency speculators.

Emefiele had further assured that there was no cause for alarm over the foreign exchange availability in the country, pointing out that the country’s FX reserves are strong and “indeed getting stronger by the day, crossing the $40 billion mark, and is one of the highest in Africa – and growing.”

He said, “We believe that if we target and support the right companies and projects, we will see a significant, measurable and verifiable increase in local production and productivity, reduction in certain imports, increase in non-oil exports, and improvements in the FX-generating capacity of the economy.”

According to a subsequent selection criteria for private sector companies to participate in the new financial instrument, the Central Bank further premised eligibility on the business’ immediate contribution to economic growth, jobs creation, and social impact.

It pointed out that in selecting the companies, evidence -based, transparent and measurable criteria shall be deployed adding that the move was to ensure the operational framework for a robust and transparent process for identifying and selecting high-impact companies and projects under its 100 for 100 PPP.

The CBN said, “These are projects that must catalyse sustainable employment-led economic growth through increased domestic production and productivity in the near term.

“The projects for consideration shall be new projects in existing companies requiring new machinery and other support and must have the greatest potential to achieve significant scale in their in-country production and for domestic consumption and exports.”