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Nigeria’s Domestic Debt and Economic Recession – An SME’s View

There is no perfect system in the world and so I assume that Nigeria is part of that imperfection. What I do not understand is how a country defies every known economic and social principles, sometimes by deliberately inflicting pains on itself. This is my sane interpretation of the economic recession that hit Nigeria, yet the lessons seem not to be learnt in any way.

Our domestic debts stands at N12 trillion (or $40 billion), as of June 2018, which is substantially high when compared to our GDP of $400 billion for the year 2017. Of truth, government bonds and bills are of less risk and high yield, reaching 18% per annum in the best case. There is also a claim that mopping the economy of free funds could control inflation – 15% as of November 2018 based on National Bureau of Statistics reports. Reality is that these sharp practices are hurting Nigeria’s economic growth.

Firstly, the implication is that continued mopping of funds from the economy denies our economic drivers access to 10% of the asset needed for job/wealth/value creation. Small and medium scale businesses need to access credit for idea execution, business expansion, and contract execution. The unavailability (or scarcity) of fund is evident as commercial banks as well as government funded banks do not provide any respite to these movers of the economy. Monies meant for credit transaction are deliberately channeled to procurement of FGN bonds and bills thereby denying the economy of this much needed stimulus.

Secondly, investors who could have collaborated with ideators renege their commitment because there is a ‘safer’ haven in FGN bonds and bills. Speculation and short term gains become the primary objective of fund owners who do not believe in the economy. Indeed, the Debt Management Office (DMO) is promoting the same ‘laziness’ that the Federal Government of Nigeria ((FGN) preaches against. The first FGN Sukuk bond which closed in September 2018 was oversubscribed by about 5% to close at N105 billion. Hence, it confirms that domestic capital market players are avoiding the risk of business investments while embracing the lesser devil of bonds.

Thirdly, it becomes even difficult to access funds from Government sponsored facilities through its sector-dedicated instruments in Bank of Agriculture (BOA), Bank of Industry (BOI), and Development Bank of Nigeria (DBN). How do you explain the economics that Government borrows money from the people at 16% per annum (for example FGN Sovereign Sukuk currently open to the public) but gives out credit to businesses at 6% for agriculture, 9% for manufacturing, and 12% for infrastructure. When these economics don’t add up, the only feasible means to recoup and earn the committed profit would be simple – pass the funds to Micro Finance banks who can charge interest up to 60% per annum for retail loan offerings. Such loans are targeted at salary earners, especially knowing the fact that many SMEs will default due to bad business environment.

It is evident that our economy will remain stagnant until we begin to reverse or correct these anomalies. CBN must regulate banks to the extent that loan profiling should show that SMEs are beneficiaries of at least 60% of credit sales. The policy on Cash Reserve Ration (CRR) should be pushed into the economy and must be pursued and verified that it gets to the desired targets – SMEs. Commercial banks must work hard to earn interest and not being lazy by procuring FGN bonds for 16% pa. DBO should validate the impact of its bonds and bills that it controls inflation without hurting the economy. It will be nice to see what the projected GDP would be if such bonds where not offered to mop funds from the economy. The Government of Nigeria needs to come true in its bid to promote enabling environment for businesses to thrive by measuring and reporting the count of new businesses and capital raised by those. Economic stimulants from BOA, BOI, and DBN should be realistic to avoid the round-tripping that we observe in our capital market. Small and Medium Enterprise Development Agency of Nigeria (SMEDAN) needs to report the ratio of beneficiary versus registered SMEs targeted by the various government incentives.

The inefficiencies caused by sharp practices continue to hamper our economic growth. I may be speaking for many SMEs who are suffering similar fate.
Author: Austyne Duru

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