Publications

The ECOWAS single currency proposed to take off in January 2020 seems unlikely1. This is partly due to the failure of member states to meet all the preliminary requirements in the original treaty. Countries like Guinea Bissau and Togo are the ones to meet the primary conditions of a budget deficit of 3% or less, an annual inflation of less than 10%, as well as a gross reserve significant enough to finance at least three months of imports2. Togo is the sole country to satisfy the second criteria of debt/Gross Domestic Product of less than 70%; central bank financing of budget deficit of 10% or less of previous year’s tax revenue; and nominal exchange rate variation of plus or minus 10%. Nigeria has achieved the budget deficit requirement with 2.8% as at 2018 and has currently grown its reserve. However, with the inflation level of 11.6%, the nation is yet to satisfy preliminary requirements for the ‘Eco’ currency. This implies a possible extension on the initiation date. Going forward, member states should make concerted efforts to strengthen domestic macroeconomic frameworks and reduce bureaucratic delays that severely constrain exports and imports at the border, among others, prior to the inception of the Eco single currency.

The federal government has finally approved the proposed increase of Value Added Tax (VAT), from the current 5% to 7.5%1. The increment was passed in the recent 2019 financial bill and included exemptions for food items (agro- and aqua-based stable foods) as well as services rendered by microfinance banks. The bill included a new VAT Company Compliance threshold, exempting  companies with an annual turnover of N25 million or less from filling obligations2. However, the current rate is marginal when compared to the VAT rate in other lower middle-income African countries like Cote d’Ivoire, Senegal and Lesotho with VAT rates of 20%, 18% and 15% respectively. Given that VAT is a consumption tax placed on goods and services, the increase stands to weigh heavily on Nigerians. The negative effect on Nigerian consumers becomes particularly more apparent considering that the government intends to reintroduce tolls to federal roads; imposes steep fines on companies such as MTN, Stanbic IBTC bank (whose customers will bear the brunt); and has recently proposed a 5% online VAT purchase tax. While raising public revenue is critical, it is imperative that the welfare of Nigerians is not negatively affected. Alternatively, other financing options can be explored such as the use of diaspora bonds and remittances.

The latest GDP report released by the National Bureau of Statistics for the third quarter of 2019, indicated a 2.28% year-on-year growth from 2018Q3. Between 2019Q2 and Q3, the GDP also grew by 0.17%1. The growth was predominantly driven by the oil sector which recorded the highest daily oil production in 3 years of 2.04 million barrels-per-day1. This indicated the oil sector real growth rate rise (year-on-year) to 6.49%2.  Meanwhile, the non-oil sector contracted to a 1.85% growth rate when compared to the 2018Q3 of 2.33%, however this indicated a Quarter-on-Quarter rise of 0.2%. The heavy reliance on crude oil is an underlying factor in the country’s flat economic growth. Ensuring that the performance of the non-oil sectors of the economy such as manufacturing and agriculture improves and becomes globally competitive is crucial in not only increasing the national output, but also expanding the foreign currency earnings and the government’s income.

Following the Central Bank of Nigeria’s (CBN) restriction of the Open Market Operations (OMO) purchase by individuals and small businesses, there has been a decline in interest rates to an 18-month low of 13.03%1. Primary market interest rates (particularly the treasury bill market) has also fallen into single digits as recent auctions saw rates as low as 7.7%2. While the restrictive policy resulting in lower interest rates can help reduce government’s borrowing costs, it could have adverse effect on investor confidence -- ultimately leading to a reduction in capital flows, external reserves and thus exchange rate. Although the CBN reassures investors that it would be a buyer of last resort where investors do not find buyers in the secondary market, there may be need to minimize regulator interference. This is on the basis that investors tend to avoid a market structure with over-interference by the regulators.

Crude oil prices declined in October 2019 and is expected to fall further in 2020. The price of Nigeria’s bonny light decreased by 4 percent from $64.02 per barrel in September 2019 to $61.45 per barrel in October 2019.5 The fall in crude oil price can be attributed to rising US crude oil stocks and reduction in crude oil supply disruption. Crude oil price is projected to average $60 per barrel in 2019 and further weaken to $58 per barrel in 2020.6 The downward revision in oil prices is linked to weaker global growth forecast and consequently, weaker oil demand. This has adverse implications for Nigeria’s trade, revenue and overall economy; and emphasizes the need for modernising agriculture, developing tourism, and  promoting entrepreneurship in manufacturing, among other initiatives.

Total transaction at the national bourse increased by 15.95 percent from ₦121.9 billion in August 2019 to ₦141.45 billion in September 2019.1 The increase in total transaction is attributable to a 47.81 percent increase in foreign transactions which outweighed the decrease in the domestic transaction (19.09 percent). We expect foreign portfolio investment (FPI) to continue to drive investment inflows into Nigeria. However, FPI could be a challenge in the near term, especially as external reserve decline and investors become wary of exchange rate stability and political uncertainties. Ongoing efforts to improve the business environment, such as tax relief for foreign investors and higher lending requirements to private sector, should be sustained. In addition, the capital market should be deepened through the introduction of derivatives to shore up investment and reserves.

On 24^th October 2019, the World Bank’s 2020 Ease of Doing Business report was released announcing that Nigeria has climbed 15-places up to 131 rank out of 190 countries globally. This piece throws more light on the ease of doing business in Nigeria and recommends a manageable three-prong strategy for further reforms – automate, simplify, and inform!

As indicated in the report, a high ease of doing business ranking implies that a country’s regulatory environment is more conducive for starting, operating and expanding local businesses; compared to other countries and the preceding years. Countries that have implemented regulatory reforms in 2018/19 making it easier or harder to do business in three or more of the ten topics compared to preceding years, recorded a growth or decline in the ranking respectively.

In total, 42 countries implemented regulatory reforms improving the ease of doing business over the period. For sub-Saharan Africa (SSA), thirteen countries – including Nigeria, Togo and Rwanda – recorded significant improvements. Although Mauritius is the highest-ranked SSA economy in the ease of doing business, Togo was the biggest improver this year – climbing by 40-places up the rank to the 97^th. For Nigeria,  which sits 15-places higher on the Ranking,  it recorded improvement in six out of the ten topics for evaluation: Starting a business; Dealing with construction permits; Getting electricity; Registering a property; Trading across borders; and Enforcing contracts.

The ranking report presenting Nigeria as one of the top improvers in creating an enabling business environment globally was a welcomed news for the Federal Government. Some spheres of the business community corroborate on the progress in the ease of doing business in the country, citing improvements such as visa-on-arrival reforms. However, some business leaders argue that the business environment has not improved, highlighting the presence of counter-productive reforms that restrict business operations; thus, questioning the reflectiveness of the Ranking.

It is important to highlight that the Ranking only measures improvements in the laws and official practices that support formal sector business processes. The scoring mostly accounted for the changes implemented by the Presidential Enabling Business Environment Council (PEBEC) set up in 2016 by the Nigerian government to progressively remove bureaucratic constraints to doing business. Some of the regulatory progress that informed the Ranking for Nigeria include:

• Starting a business: It now takes just 24 hours (not 10 days) to register a business with the Corporate Affairs Commission (CAC). The registration process now allows for online self-application without the need for a legal adviser. This change reduces the formal cost of starting a business by at least N64,000 ($177); representing the foregone cost of hiring a lawyer and the consolidation of registration documents to a single CAC form. It also reduces some informal costs incurred in the interaction with government officials including transportation, unofficial tips and unnecessary delays. The automated process also makes it easier to link business with tax authorities, dispensing the need for physical registration at the tax office.

• Dealing with construction permit: By automating and simplifying registration and payment processes, the  cost and number of required documentations for obtaining a construction permit reduced. For instance, the cost of warehouse (small business) construction in Lagos dropped from 26% to 2% of warehouse value.

• Getting electricity: This does not imply improvement in the reliability of electricity in the country; it only covers the ease of getting new connection to national electricity grid. The online application platform has reduced the connection process to 30 days as opposed several months; particularly in Lagos and Kano.

• Registering property: The use of professional consultants in the process has helped reduce the time and cost for registering properties in Lagos and Kano.

• Trading across border: Regulatory reforms led to the reduction of documents for export (from 10 to 7) and for import (from 14 to 8) enabling slightly quicker movement of goods across borders. In addition, the Apapa port in Lagos began 24/7 operation and the Request for Information (RFI) export form was digitized; leading to a 48-hour reduction in time spent for border compliance. The implementation of the single joint cargo  reducing the number of touch points for import clearing  (from 8 to 1) was also a score point  for Nigeria on the rank. Given that the data collection for the Ranking was concluded in May 2019, the impact of the recent closure of Nigerian borders affecting Benin, Cameroon and Niger were not accounted for.

•  Enforcing a contract: The score points for Nigeria was mainly due to the introduction of small claims commercial court in Lagos and Kano instituted in 2018 and January 2019 respectively. The small claims court allows for faster liquidated damage claims of below N5 million (in Lagos) and below N10 million (in Kano) for small- and medium- size enterprises (SMEs) within 60-days. There is also an opportunity for self-representation in the court. This decongests the High Court and improves entrepreneurs’ ease of taking legal action and getting justice.

However, the country did not experience significant improvement in other Ranking metrics: Paying Taxes, Getting Credit, Resolving Insolvency, and Protecting Minority Investors.

Key Limitations of the Ranking

The Ranking does not cover a broad range of areas pertinent to businesses. As the Ranking report clearly notes, its methodology has two key limitations; suggesting that the skepticism of some Nigerians over the reflectiveness of the Ranking may not be entirely misplaced:

1. It focuses only on the formal sector and formal processes: It does not reflect the informal sector which makes up to 65% of the Nigerian economy in terms of Gross Domestic Product (GDP). Also, studies show that 90% of employees in Sub-Saharan Africa operate in the informal sector. Particularly, firms in the informal sector typically grow more slowly, have poorer access to credit, do not follow the formal process of business registration – and thus the business and its employees remain outside the legal protections of the law compared to their counterparts. As such, SME owners in the  formal and informal sectors face different realities as they set up and operate their businesses –with the latter more likely to record negative experiences.
2. It omits a full range of factors, policies, and institutions that affect the quality of an economy’s business environment or its national competitiveness: It does not account for the difficulties caused by some of the biggest challenges in doing business which Nigeria and many countries face globally including: macroeconomic stability, security, state of the financial system, and prevalence of bribery and corruption.

Nevertheless, the Ranking can be deemed reflective for the metrics it covers given that it involves multiple points of information collection and a data verification/validity process. Information is typically sourced from: legal practitioners, private sector respondents, the government and World’s Bank’s regional staff in the country; with an internal review processes and a transparent complaint procedure allowing people to challenge the data.

Recommendations

Although certain key aspects of an enabling business environment are not reflected in the Ranking, the six areas of reforms where Nigeria has recorded improvement were felt by many formal business owners, especially in Lagos and Kano. These reforms not only minimizes the time and cost of doing business for entrepreneurs and the government (in the areas it covers), but also strengthens transparency in payment and government revenue generation.

However, these reforms have been largely limited to Lagos and Kano – which are the only two states the Ranking accounts for. To ensure that these reforms are not aimed at ‘gaming’ the Rankings, these improvements should be extended to other states in the country including southeastern states. Enhancing other government procedures and services for local businesses is required to ease business difficulties in the country, including taxation and obtaining credit – for which the country did not show any significant score progress. Although the Ranking does not cover infrastructure constraints, it remains one of the biggest challenges at a significant cost to Nigerian businesses, particularly electricity reliability and transport network.

Finally: drawing from the case study of the reforms in the Ease of Doing Business, successes in reforming other areas of government services require a three-prong approach:

Automation: Entrepreneurs typically resort to informal activities, when regulatory processes limit their ability to freely operate private businesses, whether by intent or ignorance. Deploying technology and making processes accessible online makes a great deal of difference. The use of modernized information technology infrastructures increases efficiency, reduces physical interactions between government officials and service beneficiaries, and eliminates the physical exchange of cash --which can reduce rent-seeking behaviors. Ensuring little or no human contact in obtaining government services would make a great difference in the ease of doing business; particularly eroding the “unofficial but almost compulsory tips” paid to receive services. Automating processes can also help cut down the number of officials required for a given service, with a significant impact in reducing the huge sum (nearly 50% of budget expenditures) spent annually on government recurrent expenditures.

1. Simplification: Several required processes for receiving a government services can be consolidated into a fewer processes to reduce the hassle for business and rent-seeking opportunities for officials. Firms tend to opt for informal or unofficial  arrangements to bypass rules where regulation is tedious; thus, economies with burdensome regulations typically have higher levels of informality. Reforms that seek to simplify regulatory processes can make a great difference in serval government services including taxation.
2. Information: Before, during and after reforms are implemented, end-users or beneficiaries must be made aware of prospective and ongoing changes. Information about the reform should be well-disseminated, first, among the implementers (the agency carrying out the reform) at all levels, then relayed to beneficiaries using the most effective communication channels. While improvement in the ease of registering with CAC was implemented two years ago, for instance, the information only just begone to trickle down to users, and many Nigerians still remain unaware. For a seamless reform, implementers need to be transparent in communicating the benefits and downsides of the change, with complaint procedure to welcome feedback to be improved upon.

External/foreign reserves depleted by 0.6% to $40.7 billon for the week in review from $41.04 billion, the lowest since January 2018.³ The reserve has steadily plunged since the last week of July, losing about $5 billion in the last 4 months. The depletion in external reserve is attributable to the Central Bank of Nigeria (CBN) intervention in the foreign exchange market to prevent depression arising from capital flight.⁴  This capital flight has been largely driven by rising uncertainties in the Nigerian economy, in addition to lower but expected increase in the United States’ interest rate. While the monetary authorities have maintained foreign exchange stability at the expense of foreign reserves, there is need for fiscal authorities to supplement efforts to sustain reserves. Social, economic and political uncertainties –arising from the recent border closure for instance – are disincentives to investment that should be tackled to boost investors' confidence and shore up external reserves.

Consumer prices for the month of September 2019 increased by 0.22 percentage points. Specifically, inflation rate increased from 11.02 percent in August to 11.24 percent in September 2019.¹ The rise in inflation rate is attributed to an increase in both core and food components which rose by 0.34 percent and 0.26 percent respectively. The Inflation Attitudes Survey conducted by the Central Bank of Nigeria in 2019 Q3 suggests that 52.9 percent of respondents believe that the economy would end up weaker if prices rise faster than they do now.² Respondents also indicated that they will prefer higher interest rates to higher consumer prices. This continuous rise in the prices of goods and services leaves households and firms with less disposable income and profit respectively. Going forward, we expect demand-pull inflation to rise stemming from the soon-to-be implemented minimum wage, and cost-push inflation emanating from increase in energy and food prices as we approach the festive season.