As I travel around the country, there is one thing that seems purely universal in Nigeria: massive unemployment. Unemployment has reached the level where government must declare a state of emergency to fix it. I mean, it is very alarming that extremely brilliant young people in Nigeria cannot find jobs.
In my typical way, I would offer a suggestion to the government. Here is a summary of a strategy I do think could boost economic growth and get people back to work.
Forget Free Market; Stimulate the Economy with State Guarantees
My suggestion to the President is to listen less to people that tell him that free market would drive all vibrancy in our economic system. The private sector is working but we are not growing enough companies due to funding paucity in Nigeria. The implication is that most firms are not following their growth trajectories. Without those trajectories, the firms cannot hire for expansion. So, we are on paralysis because many companies which are entering their 10-15th birthdays are trapped within a banking system that does not have much assets to offer loans. You should not fault the banks; they have capital adequacy ratios to meet in an economy which is just coming out of recession.
To fix the growth stasis, the government should use state guarantees to unlock $10 billion in loans to at least 50,000 companies in Nigeria at average business loan of $200,000. Under this scheme, government would guarantee 25% of all business loans made by commercial banks. In other words, government would cover any loss by up to 25%. With this, banks would drop their tight credit criteria and allow some companies which might not have qualified for loans to qualify. This is basically playing at the borderline of creditworthiness with the guarantees flipping it for businesses.
Under this scheme, I expect loan growth to hit at least 30% within a quarter. That would put many companies on the path to move to the next level of their business lifecycles. As they grow, I expect them to hire. That would help in fixing the massive unemployment in the land.
Historically, government had focused on funding new companies. While that has merit, the reality is that new companies take time before they can add workers. The strategy now would be to stimulate already operating businesses which need capital to grow. Here are some elemental components of this plan:
- BVN is a must: All the businesses that need loans must have BVNs to ensure the identities of the promoters are documented.
- Digital Payment: Government would push as much as possible to get many of the companies to collect payment digitally (not just online). The goal is to have real insights on cashflow, and how the firms are doing. Also, digital receipts would make it possible to collect the right tax from them.
- Existing companies: Focus on existing companies and help them expand, over funding startups. Companies must be at least 3 years old to qualify.
- Banks decisions: The banks would have 100% control on the credit decision and administration. Only the banks would determine the companies they would lend to; after all they are going to lose 75% of the money if things go bad. But with the 25% of potential loss covered, they would be encouraged to reduce their criteria. Government would bound the maximum amount which can be loaned to a single firm or promoters under the scheme.
- Software automation: The whole process of this scheme must be wholly transparent to the business community, banking sector and the government. I recommend creating a software system to make that happen.
I project the following as impacts: Each of the 50,000 benefiting companies would add 10 employees within a year for a total capacity of 500,000 (direct) new jobs. The boom in the economy as result of this expansion (the new workers would spend money, the banks would expand, the firms doing business with these 50,000 companies would expand, etc) would result to additional 1 million jobs.
So, within a year of the initiative, government would have created very good 1.5 million jobs. And it can do this without losing a dime if the loans perform well.---