Towards a business-friendly environment

Small and medium sized enterprises stand to benefit from the recently launched 60-day National Action Plan by the Presidential Enabling Business Environment Council (PEBEC). This group contributed 50% to Nigeria’s national output in 2016.

The ministries, departments and agencies (MDA) are tasked with implementing the plan but participation from other stakeholders such as specific state governments, the National Assembly and the private sector, is also required if the plan is to have any realistic chance of succeeding.

Nigeria is currently ranked 169 out of 190 in the ease of doing business index by the World Bank. There are eight focus areas within the plan; ‘starting a business’ features at the top.

Generally, in Nigeria, the procedure for start-ups is cumbersome. When compared with developed economies, there are at least two times as many steps required. The action plan aims to reduce the number of days required to register a business from ten days to two. The Corporate Affairs Council will drive this by adopting a more electronic approach

To stimulate economic growth, a strategy, which is popular in developing nations, is boosting employment through the empowerment of small and medium scale enterprises (SMEs). The CBN defines SMEs as companies with an asset base between N5m and N500m (US$2.5m), and staff strength ranging from 20 to 300 employees.

For instance, in Canada, SMEs account for over 60% of employees in the private sector and contribute slightly over 50% to economic output produced by the business sector. Meanwhile in the US, SMEs represent 49% of private-sector employment and account for 98% of firms exporting goods and 33% of exporting value.

Harnessing the economic potential of this segment in Nigeria is still a mirage since several supporting policies have not delivered on set milestones due to poor implementation, inadequate funding, power supply shortages etc. However, this administration has shown some interest in developing and empowering SMEs. Infrastructure deficit has played a major role in hampering SME growth in the country. In this regard, power shortages stick out like a very sore thumb.

Perhaps, this year, when the budget is finally released, we may see some traction with infrastructure development across the country as N2.2trn has been set aside in this year’s budget proposal for capital expenditure. The ministry of power, housing and works accounts for 24% of the total projected capital expenditure while the ministry of transport accounts for 12%.

Certainly, it is one thing to receive the necessary funds for project facilitation and another to actually implement. Thus, the onus is on the government to implement effectively.

Another area the National Action Plan by PEBEC covered is trading across borders. This is not very encouraging in Nigeria. It seems the FGN has considered reducing the number of agencies operating at the air and sea ports to ease the process of clearing goods to within 24 or 48 hours. This should promote growth and stimulate pan-African trade. The latest monthly Economic Report from the CBN puts non-oil exports provisionally at US$1.1bn in Q4 2016, indicating substantial rises of 128% from Q3 2016, and 367% from 2015. On an annualised basis, non-oil export earnings stood at US$3.2bn in 2016, representing just 0.8% of GDP for the year.

If Fx liquidity is sustained and there are increased incentives for exports (such as the reintroduction of the export expansion grant) as well as promotion of trade across borders, there should be a pickup in export-oriented activities and a considerable rise in non-oil revenue which bodes well for the country’s fiscal position.

Business travel into Nigeria can be challenging due to the long visa on arrival and submission processes as well as the poor conditions at the airports; this discourages potential foreign partnerships. However, the council has now harmonised the entry and exit forms at the airports. Additionally, authorities at the airports have been mandated to install the iCheck Security Solution Technology, which should phase out entry and exit forms in the medium to long term.

The initiatives spelt out in PEBEC’s action plan are laudable but there are still teething problems preventing businesses from thriving. Besides power supply issues mentioned earlier, access to finance also features at the top and a lack of it has disfigured businesses and in some cases resulted in business failures or shutdowns.

Recent data from the People’s Bank of China show that China experienced a 17% increase in small business lending in Q1 2017; SME loans now account for nearly a third of all outstanding loans.

Based on data from the CBN, loans to small scale enterprises from commercial banks amounted to N103bn in 2014 (representing less than 1% of the total loan book that year). Unfortunately, the fragility of the macroeconomic environment and growing concerns around non-performing loans suggest that loan growth from commercial banks will be at best subdued in the near term.

On a brighter note, the Development Bank of Nigeria (DBN) recently received a licence for wholesale development finance from the CBN. The bank will be able to draw from funding pledges totalling US$1.3bn from the World Bank, the African Development Bank, and German and French state development funds. The DBN will provide loans at lower rates to viable businesses focused on any sectors of the economy.

Although not as popular in Nigeria as in developed economies, funding businesses can also be through support from venture capitalists, angel investors or private equity firms. Venture capitalists typically swoop in to assist already established businesses that may be drowning while the other two are usually seed investors for start-ups or small business with low capital base.

For the real economy, a conducive business climate will bolster job creation, improve household pockets, per capita income, business and consumer confidence as well as general quality of life.