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RSSF: Supporting Real sector for poverty reduction

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By Arize Nwobu

THERE are four things of strategic importance which are lacking largely in most African economies and have resulted in the retardation of growth and development and prevalence of poverty in the vastly endowed continent.

They are, industrialisation, ‘’agriculture miracle’’, robust financial systems and inspiring leadership. Industrialisation is the key driver of modernisation and development. It helps to improve the living condition of the people. But it has been noted that there is little industry in Africa- the continent has failed to industrialise in the 25 years since the first African Industrialisation Day.

Also, the ‘’agriculture miracle’’ which transformed other developing countries has not been witnessed in Africa even as African financial markets lack depth and breadth, without creative financing mechanisms and developed capital markets. Above all, leadership in Africa has not been inspiring, and grossly short changed development and raped the people.

Effective leadership results in productivity and positive change. Lee Kuan Yew transformed Singapore and has become a case study in leadership. Gandhi challenged India when he announced that if India could not clothe its citizens by producing needed textiles locally, they should all go naked. India transformed to become a super power in textile manufacturing. It is the same for most East Asian countries – the Asian Tigers – which emerged through inspiring leadership to be reckoned with in the global economy.

The narrative is different for Africa, thus the high rate of poverty and low Human Development Indices, HDI, that are pervasive in the continent. It has been reported that Africa is the poorest continent on the planet and half of the African population live in poverty. The rate of poverty in Nigeria is 62.60 per cent with about 100 million people living below US$1 per day. The Misery Index is 48 per cent, ranking Nigeria as the fourth on the global index according to the National Bureau of Statistics, NBS.

Nigeria’s population growth rate outstrips economic growth. And it has been projected that the population will hit 234 million in 2025 at a cumulative average growth rate, CAGR, of 2.5 per cent which poses a threat to national security vis-à-vis unemployment rate and youth unemployment.

In a report on Monetary Policy and Unemployment: Is there a Dynamic Relationship?, the Central Bank of Nigeria, CBN, noted that ‘’with global unemployment projected to reach 215 million by 2018 experts fear for Africa, particularly Nigeria’s share of the global scourge might increase disproportionately, with attendant unsavoury consequences unless the country immediately adopts pro-active and holistic approach to halt the rising youth unemployment.’’

Nigeria’s high rate of poverty has been linked to petrodollar. The country has been over dependent on oil, but it has been postulated that no country becomes rich by exporting raw materials without an industrial sector. Experts have noted that Nigeria had a good head start in the beginning with a robust plan towards industrialisation but lost the trajectory because of petrodollar.

The economy needs to be redirected based on knowledge and understanding of economic dynamics, creative strategies and political will. Four key sectors which constitute the dynamics of an economy are the financial, fiscal/government, external and real sector. The financial sector is the lifeblood of the economy which channel funds from surplus to deficit ends.

A robust financial system ensures stable macro-economy which enables businesses to plan conveniently, and helps to attract foreign capital. Though Nigeria’s financial system has undergone transformational changes which enhanced the landscape, there is need to evolve more creative financing mechanisms and optimally utilise the instrumentality of the capital market to close financing gaps and catalyse industrial growth faster for greater job opportunities.

The fiscal/government ensures enabling environment and macro-economic stability by sustaining aggregate demand which also enables economic agents to plan with confidence. The fiscal authority may need to harmonise and synergise more with the monetary authority for quantum leap developments in the economy.

The external sector interacts with economies of the other countries as in exports and imports.  Nigeria as an import-dependent economy is disadvantaged in this regard because of unbridled importation. We import virtually everything such that we have been described as the ‘’junk yard’’ of the world. Unbridled importation creates jobs abroad to our detriment.

The real sector is the engine and driving force of the economy. It comprises manufacturing and agriculture where goods and services are produced through the combined utilisation of raw materials and other production factors such as labour, land and capital.  According to the CBN, ‘’the real sector creates more linkages in the economy than any other sector. It has capacity to generate high employment and income generating potential. It satisfies aggregate demand and is connected to the standard of living of the people and used to measure the effectiveness of macro-economic policies.’’

The key to industrialisation is a combination of robust financial system (encapsulating creative financing mechanisms and optimal utilisation of the capital market), and well funded and vibrant real sector, all things being equal.

At its July 2018 Monetary Policy Committee, MPC, the Central Bank of Nigeria stressed the need to channel greater and long-term capital flow to the real sector of the economy through the Real Sector Support Facility, RSSF, and Corporate Bonds, CBs, to encourage local manufacturing, bolster economic recovery and stimulate growth and reduce poverty. The RSSF would be for the financing of Greenfield (new) and Brownfield (new/expansion) projects in the manufacturing and agriculture sectors only, and such projects would have high local content, foreign exchange earnings, potential for job creation and import substitution among others. Trading activities and refinancing of existing projects are prohibited from accessing the facility.

The RSSF would be accessed through the Cash Reserve Requirement ,CRR of deposit money banks at an all-inclusive interest rate of 9 per cent per annum.

Cash Reserve Requirement is ‘’a specified fraction of the total deposit of customers which commercial banks have to hold as reserves either in cash or as deposits with the central bank.’’ It is one of the monetary tools used to regulate money supply in the financial system to avoid banks from over extending themselves so they would not create a knock on effect on other over extended banks.

According to the Central Bank of Nigeria, banks that are interested in financing projects should request the freeing of funds from their CRR. The maximum facility would be N10 billion per project with a minimum tenor of seven years and two years moratorium. For Corporate Bonds, which are financing instruments issued by corporate bodies, the guidelines stipulate among other things that ‘’such requirements would include publishing through printing of an Information Memoranda spelling out details of the projects for which funds are required together with terms and conditions showing that these are long term projects that are employment and growth stimulating.’’ Also, the tenor would not be below seven years and with a moratorium as specified in the Information Memoranda.

The Real Sector Support Facility has been commended as a creative initiative which will trigger credit flow to the real sector to impact growth. Though some economy watchers have noted that CBN would have crashed the interest rate holistically for all sectors of the economy, but it is believed that the apex bank adopted the targeted action approach for strategic reasons. Some experts have noted that it would be dangerous to crash interest rate and create easy money ahead of election time because it would turn expansive in the short-run and trigger long-run inflationary consequences – a development most central banks dread.

The objectives of the RSSF and CBs are in line with some other policies of CBN such as the exclusion of 41 items from interbank foreign exchange market which are, to reduce unbridled importation, conserve foreign reserves, encourage local manufacturing, achieve self-sufficiency, create more jobs, reduce poverty and redirect the economy towards industrialization, all things being equal.

Nwobu, a Chartered Stockbroker and Business Journalist wrote via Tel: 08033021230


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