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What can a country do with $14bn? This is the extent to which Nigeria’s foreign exchange reserves fell between July 2014 and December 2016, due largely to the oil price tanking below $50/barrel in January 2015.

Considering that Nigeria needs some $30bn in annual investments to close its current infrastructure gap, it is probably not much. But put that amount into other problems that need solving and the impact could be quite significant.

The agriculture-boosting financing initiatives of the Central Bank of Nigeria (CBN) have been hugely successful. But imagine how much more impactful the $127m Anchor Borrowers’ Programme (ABP) and the $500m Nigeria Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL) could have been had they been availed of an additional $14bn, most of which went to fund imports over the past two years.

Other sectors of the economy could have benefited had the authorities taken the advice freely given by pundits, the International Monetary Fund (IMF) and the World Bank to allow the naira to trade freely. Arguably, increased confidence in the economy by foreign investors – now fervently courted for their scarce dollars – would have boosted agriculture, manufacturing and so on.

Incidentally, the authorities would now be lucky to get that much money from multilateral lenders. The IMF readily approved $12bn for Egypt after its authorities conceded to reforms, and the Nigerian case would probably have been plain sailing had there been a similar meeting of minds. For a half-trillion-dollar economy, Nigeria is an attractive borrower.

But has monetary policy suffered as a result of the CBN’s developmentalist tilt? Because even as the authorities may be finding some solace in an imminent recovery of the economy, with the country likely out of recession in 2017, it is hard not to wonder if the economy could have avoided many of its self-inflicted troubles had the CBN been more focused on its primary remit.

And even in the dispensation of what by its own admission were unorthodox policies to suit the times, how much of its development financing reached the intended hands remains an open question. Charles Robertson, global chief economist at Renaissance Capital, an investment bank, puts it this way: “The development banking aspect of policy carries a risk of funding burdensome white elephants potentially driven by corruption rather than actual need – but a well-directed development spend can make a big difference.”

After a 200 basis point cut in the monetary policy rate to 11% in November 2015 did not translate into reduced commercial lending rates, the CBN reversed course, hiking rates by 100 basis points to 13% in March 2016 and by 200 basis points to 14% in July 2016, where it remains at the time of writing in April 2017. The apex bank reckoned fighting inflation, its primary remit, was more within its power than trying to get banks to reduce interest rates and thus boost economic growth.

 More intervention

Thereafter, the CBN decided it could still intervene in other ways. With still ample cash at its disposal, it decided to boost credit to identified key sectors at single digit interest rates. Agriculture was ideal because not only was the sector contributing at least a quarter of GDP, it also employs at least half of Nigerians.

However, these attractions did not impress commercial banks, which considered the sector too risky. The increasing success of the ABP and NIRSAL vindicates the CBN’s efforts. Agriculture grew by 4.1% in 2016, an improvement on the 3.7% growth in the sector the year before. Better still, it is set to pick up pace in 2017. There is actually now talk of rice (target crop of the ABP) sufficiency this year, a great relief for authorities that harp on about $20bn lost annually to food imports.  

As the CBN was also the primary supplier of foreign exchange, the monetary authorities decided they could also deliberately aid productive sectors of the economy through easing access to scarce foreign exchange.

The manufacturing sector was a major target, with players in dire need of foreign exchange for machinery and key inputs that could not be produced locally. Unsurprisingly, this did not prove to be as successful, and there were myriad accusations of corruption.

Some of the manufacturers used foreign exchange allocated to them for the purpose they were assigned. Some did not. Some banks also actively aided the sharp practices by delaying disbursements to successful applicants while they tried to earn some arbitrage profits in between.

Thereafter, manufacturers also sought some arbitrage profits of their own before grudgingly buying the supposed inputs or machinery. And even then there were reports that quantities procured were sometimes not as much as applied for.

Sharp practices

By and large, these sharp practices, motivated by the multiple exchange rates regime of the CBN, ended up being inimical to the economy, exacerbating the problem it was meant to ameliorate. Inevitably, this preferential foreign exchange supply policy was recently scrapped – albeit after foreign exchange increasingly became more readily available, as crude oil prices started trending above $50.

It is not all bad news though: the CBN’s support of the Dangote Refinery being built by Africa’s richest man, Aliko Dangote, may be vindicated before long. When operational, the Dangote Refinery will be able to meet all the local demand for fuel (petrol, diesel, kerosene and aviation fuel). Fuel imports gulped about $10bn in 2016.

But was it all necessary? Could a transparent market-based economy and system have incentivised other entrepreneurs to do even more? Besides, was the CBN the right institution for these interventions? And did monetary policy suffer? Tight controls over foreign exchange scared away foreign investors from naira assets. Investors remain largely out, going for the assets of other African economies with less scale but more transparency and predictability.

Clearly, when a central bank turns itself into a development bank, something gives. It needs pointing out that a state-owned agricultural bank exists. And for the manufacturing sector, there is the CBN-backed Bank of Industry. Although plans are afoot to boost the capital base of these specialist institutions, these initiatives seem like afterthoughts.

Good thing then that the newly established Development Bank of Nigeria – which got $1.3bn in loans from the World Bank, African Development Bank and others in April – will specifically take on this mandate.  

Rafiq Raji

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