BusinessDay

Improving Nigeria’s business environment

Large population size does not always mean a large market

Nigeria has often been lashed for its unfavourable business environment which is made worse by regulations that suffocate and stifle economic activities.

The recent announcement by Shoprite of its exit from Nigeria reinforces this discourse, giving urgency and fillip to the need for Nigeria to fix some fundamental factors affecting businesses in the country.

President Muhammadu Buhari, in a twitter post in October 2019, commended the efforts of the Presidential Enabling Business Environment Council (PEBEC) for being instrumental to the improvement in Nigeria’s World Bank Ease of Doing Business ranking, having moved 15 steps to rank 131.

However, while the ease of doing business may have improved, the actual process of running a business has been stifled.

This doesn’t dispute the fact that despite the harsh climate in which some businesses in Nigeria operate, there are still others that have structured models making them profitable and remaining going concern.

Flour Mill, for example, delivered an extraordinary performance with a 184-percent growth in net income to N11.3 billion. Similarly, revenue increased by approximately 9 percent to N573.7 billion for the year ended March 31, 2020. Dufil Prima Foods is another example of a successful business under an unfavourable climate.

This portrays the good, the bad and the ugly of doing business in Nigeria. The exit of Shoprite after fifteen years of business in Nigeria should raise concern bearing in mind that the company has helped formalise the Retail-Consumer Staples industry in Nigeria.

The relevance of Shoprite’s Nigerian market is slightly exaggerated. While sales in Nigeria contracted by 5.9 percent and 6.7 percent in the first and second half of the year respectively, sales in South Africa grew by 9.8 percent and 7.5 percent in the first and second half of the year.

One important lesson here for Nigeria’s policy makers is that a large population size does not always mean a large market. It is only a potential market at best. Unlocking such potential will depend on improving demand by creating jobs to improve households’ income levels, boosting purchasing power by lessening inflationary pressures and strengthening macro fundamentals.

In August 2019, Shoprite stated that a decline in local currencies against the dollar and rising inflation in Nigeria and other African countries impacted its full-year financial results.

Earlier in February of the same year, the company said currency devaluation in such markets as Angola, its biggest operation outside South Africa, and Nigeria, have made it difficult for it to operate profitably elsewhere on the continent.

While we anticipate the unification of Nigeria’s exchange rates by the CBN which will ultimately mean further devaluation, Nigeria must opt for economic diversification to strengthen the value of the naira. It is pertinent to stress here that, for so long as crude oil – which is denominated in dollars – accounts for about 90 percent of Nigeria’s export, any negative shock in oil prices will see devaluation pressure mount on the local currency. This will always threaten the profitability of Foreign Direct Investments (FDIs) like Shoprite in Nigeria. Nigeria must, therefore, create demand for its currency and that can be achieved by improving other sectors of its economy and boosting the share of naira-denominated exports.

While some businesses cease to be going concern in Nigeria and others manage to stay afloat, fixing the country’s fundamental issues impeding growth, will not only save businesses but also improve profitability of existing ones while attracting more FDIs.