News Column

Development Finance, Economic Growth, and Job Creation

May 2, 2014

Chinedu Moghalu

The Export-Import Bank of the United States (US Ex-Im) recently marked its 80th anniversary of promoting U.S. exports abroad and supporting domestic jobs. The Bank has, in its eight decades of operation, authorized an estimated $506 billion to finance the export of U.S. goods and services around the globe and supported millions of American jobs with an unapologetic bias for small businesses which got nearly 90% of the Bank's transactions in 2013 alone.

This underscores its commitment to the sector that is widely acknowledged as the U.S. "engine of growth."

US Ex-Im Chairman and President Fred P. Hochberg, enthused at the programme of the anniversary that for 80 years, the Bank "has supported millions of American jobs and financed over $500 billion in goods stamped 'Made in the USA,' and we've done it all while generating billions of dollars in revenue for U.S. taxpayers."

Institutional evolution

President Franklin D. Roosevelt established the Export-Import Bank of Washington by an Executive Order on February 2, 1934. The Bank was mandated to aid in the financing and facilitation of exports and imports, and the exchange of goods between the U.S. and the world.

This was the period of the "Great Depression." Therefore, the overarching mission of the Bank was to stimulate economic growth through job creation. Within four years, the Bank expanded its scope and approved loan packages in more than 30 countries, half of which were in Latin America and the Caribbean.

Most of the facilities at the time were targeted at infrastructure development such as $22 million loan to China for construction of the Burma Road and the construction of the Pan-American Highway. With the end of the 2nd World War, the Bank became one of the veritable platforms for the administration of funds for economic cooperation under the Marshall Plan.

In whatever project or trade it was investing or providing credit facility, the aim and interest was to support U.S. small businesses, manufacturers and exporters, to create jobs in times of economic crisis when limitations on commercial credit arise.

Till date, the business of the Bank is ensuring that American entrepreneurs have the tools they need to succeed in international markets. These include export-credit insurance to first-time exporters and working-capital guarantees.

Contemporary development finance

The US Exim, like other Export Credit Agencies (ECAs) and Development Finance Institutions (DFIs), are mostly government institutions set up to intervene and stimulate economic growth, create jobs and foster citizens' social welfare through the instrumentality of grants, low-interest lending and export credit guarantees and insurance. This policy serves to strengthen Small and Medium-scale Enterprises (SMEs), and support broad-based private sector ingenuity and entrepreneurship.

Today, the philosophy of the State intervention that was expressed in the founding of the US Exim has gained global embrace. During the last economic and financial crisis, the Governments of the Organisation for Economic Cooperation and Development (OECD) and Group of 20 (G20) countries undertook new efforts to support alternative sources of finance in order to fill the gap created by the near-exit of the banking sector from commodity trade finance.

The key channels of disbursement were the ECAs, DFIs, Official Development Assistance (ODA), Aid for Trade initiatives supported by the multilateral DFIs, and South-South financing schemes.

In its 2010 report on Access to commodity finance by commodity-dependent countries, the United Nations Conference on Trade and Development (UNCTAD) revealed that the International Finance Corporation (IFC) increased ceiling of its Global Trade Finance Programme (created in 2005) from $1.5 billion to $3 billion.

It also introduced a new programme - the Global Trade Liquidity Programme - which aimed at raising $5 billion from G-20 members and international finance institutions to be directly lent to emerging market importers and exporters. The programme pools government and private sector bank funds and then on-lends money via global banks to local banks, who in turn lend to small and medium-sized enterprises (SMEs).

In sub-Saharan Africa, the need for ECA/DFI intervention in certain sectors of the economy such as mining, power, infrastructure etc. has been clearly seen in some of the foremost export credit and insurance companies in the continent.

For example, the Export Credit Insurance Corporation (ECIC) of South Africa has virtually become the financial platform for the booming mining sector in the SADC region. By the end of 2012, it had funnelled as much ZAR 17 billion, with commitments close to ZAR 21 billion in the next 3 years. The ECIC has extended its funding coverage to West Africa.

NEXIM Bank

Back home, the Nigerian Export-Import Bank (NEXIM) was established by Act 38 of 1991 as Nigeria'sExport Credit Agency (ECA) and Trade Policy Bank. It was effectively charged with the broad mandate to promote the diversification of the Nigerian economy and develop the non-oil export sector through the provision of the following services: Credit Facilities in both local and foreign currencies, Risk-bearing facilities - Export Credit Guarantee & Export Credit Insurance, Business Development and Financial Advisory Services, and Trade & Market Information.

As an ECA/DFI, the primary motivation for NEXIM Bank's business is not profit maximization. Rather, it is to promote economic growth and job creation. The Bank's business model is to be "additional" and "catalytic" by seeking to invest in sectors and segments that would not otherwise have had access to finance from commercial banks.

The Bank seeks to bring in expertise and provide the support needed to ensure real commercial development of its investments rather than taking a buy-and-sell orientation. In its catalytic role, NEXIM partners with co-investors to 'de-risk' sectors and establish potential for profitability, and then attract further funding and investments from private sector funders.

In line with the call by President Goodluck Jonathan under the Transformation Agenda, Vision 20:2020, and within the limits of its mandate and mission, NEXIM focuses on SMEs in the MASS sectors, namely Manufacturing, Agriculture, Solid Minerals & Services. Since its inception, the Bank has supported over 1,000 SMEs, many of which currently rank among the top 100 exporters in Nigeria.

Although its capital compares lower to other ECAs/DFIs, some of which have attained the status of global institutions, NEXIM Bank has made its developmental impact felt through the number of jobs it has created and helped sustain as well as the amount of foreign exchange earnings it has helped Nigeria generate.

The Bank's total credit in local and foreign currencies to Nigerian businesses exceeded N87 billion and USD300 million respectively at YE 2013. The interventions have generated and sustained over 57,255 jobs.

The Bank was in November 2013 ranked "Best Performing Development Finance Institution" by the Association of African Development Institutions (AADFI). This was in recognition of its adherence to best practices in corporate governance, risk management and strategic focus.

In addition to the above impact, the Bank is committed to deepening trade between Nigeria and other countries of the African region through the facilitation of a Sealink Project. This is a Public Private Partnership initiative by ECOWAS and Central African countries to help realize a leap in intra-Africa trade.

The issues of myriad bottlenecks such as inadequate or non-existent infrastructure, lengthy complex procedures, and inefficient border administrations, regulatory discrepancies have hampered trade and economies of scale within the ECOWAS region and beyond for Nigerian exporters and entrepreneurs.

The expected benefits from the Sealink initiative is that it will lift the 'freight burden' on Nigerian and other exporters from West and Central African. For instance, it presently costs E2,100 per container and about 50 days to have goods delivered from Apapa ports in Nigeria to Douala ports in Cameroun or Tema Ports in Ghana; while it costs about $1,900 and 21 days to freight same from China to Nigeria.

International Collaboration

NEXIM Bank tries to complement its funding capacity by attracting foreign investment capital towards the development and growth of the MASS sectors of the Nigerian economy. The Banks has embraced such instruments as concessional lines of credit, co-financing arrangements and facilitation of buyers' and suppliers' credit.

At present, the Bank has a USD50 million line of credit with the African Export-Import Bank (Afrexim) which was executed in 2010. There is also an existing USD20 million line of credit with Exim India, executed in 2011. In 2013, NEXIM sign a USD200 million Master Line of Credit agreement with African Development Bank. The facility is a Sovereign guaranteed loan to be disbursed in three tranches and designed as an export-oriented SME funding scheme to be availed to Nigerian exporters.

NEXIM Bank and US Ex-Im Bank currently have no existing signed memorandum of understanding such as exists between NEXIM and India EXIM but a relationship largely hinged on a transaction basis.

Under this arrangement, US Ex-Im will support exports of goods and services of American origin to Nigeria through a variety of products, including loans, guarantees and insurance services.

However, as the intensity of export financing transactions between the US and Nigerian businesses grow, it may become expedient and more beneficial for the two ECAs to push for stronger and more sustained economic collaborative partnerships in relevant areas of operation.

Not only would such a relationship provide stronger and more rewarding synergies, it would also broaden the focus of interventions and enhance the processes of US Ex-Im as it leverages on the deep sector-specific knowledge and expertise of NEXIM Bank which has been promoting Nigerian SMEs for the past twenty-three years.

Moghalu is Head, Corporate Communication Department, Nigerian Export - Import Bank


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Source: AllAfrica


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