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Business in Nigeria good but tough

29 October 2013 Theo Reddi, Credit Guarantee

“Opportunities for business and trade with Nigeria remain good but tough for both the corporate and individual, irrespective of the resources available to them,” comments Theo Reddi, General Manager Exports, at Credit Guarantee Insurance Corporation. “However, success stories have been reported for those who have ‘done their homework’ and taken the time to understand the Nigerian market dynamics. 2014 may be a challenging year for Nigeria with elections due to take place, and the IMF revising their growth forecasts downward.”

Nigeria is the most populous African country on the continent with more than 160 million people. Its GDP in 2012 was upwards of US$455 billion; with a strong surge in oil production, the economy has expanded quickly, achieving an average annual growth rate of 7% over the past five years. The country is Africa’s leading oil producer, although sabotage of oil facilities and pipelines and violent attacks on foreign oil workers in the Niger Delta impede output. Nigeria’s previous military rulers failed to diversify the economy away from its dependence on the oil sector which currently accounts for approximately 95% of foreign exchange.

The country continues to be hampered by political instability, corruption, inadequate infrastructure, and poor macroeconomic management; slow implementation of reforms remains a hindrance to growth, but Government continues working towards developing stronger public-private partnerships for roads, agriculture, and power.

Government has begun to show the political will to implement market-oriented reforms previously urged by the IMF. Some of these include the modernisation of banking systems, removal of subsidies, and resolving of disputes relating to the distribution of earnings from the oil industry. The country was not immune to the global financial and economic crisis and the Central Bank governor has taken measures to restructure and strengthen the banking sector to include imposing mandatory higher minimum capital requirements.

According to the Heritage Foundation in partnership with the Wall Street Journal, the public and energy sectors employ much of the formal labour force, and an increase in the minimum wage has reduced hiring flexibility and undercut labour productivity. The structural changes that are critical to broad-based development have not emerged. There has been prolonged regulatory uncertainty with legislation designed to introduce sweeping changes to the oil and gas industry not moving forward over the past four years. The legal system suffers from political interference, bureaucratic delays, insufficient funding, and the lack of a document-processing system. One of the world’s least efficient property registration systems makes it difficult to acquire and maintain rights to property. Enforcement of copyrights, patents, and trademarks is deficient. Rampant corruption, high crime, and insecurity continue to weaken the rule of law.

Ethnic, regional, and religious violence has taken a heavy toll, aggravated by the imposition of Islamic law in the northern states, while Islamic terrorism by Boko Haram in the predominantly Muslim North has caused regional instability. Oil and gas account for about 90% of export earnings and 80% of government revenue. The informal economy is extensive, and a majority of the population is engaged in agriculture.

The Foundation reports that the top income tax rate is 24% and the top corporate tax rate 30%. Other taxes include a value-added tax and a capital gains tax. The overall tax burden equals 16.3% of total domestic income. Government spending is equivalent to 29.1% of total domestic output. The budget is in a slight surplus, and public debt remains below 20% of GDP.

The entrepreneurial environment continues to be burdened by time-consuming and costly regulatory procedures. The minimum capital requirement for starting a business has been eliminated, but licensing costs still average over four times the level of average annual income. Inflation has eased somewhat but is still high.

The trade-weighted average tariff rate is quite high at 10.6% and slow customs procedures further deter dynamic growth in trade. Most sectors are open to private investment, and regulations formally treat foreign and domestic investment equally, but the investment regime lacks efficiency. Reform in the financial sector has been ongoing since 2009, but the state continues to influence the allocation of credit.

"South African exports to Nigeria totalled R5.8 billion in 2011, R6.4 billion in 2012 and R4.63 billion in Jan-August 2013 (compared to total African exports of R95.1 billion in the first eight months of the year),” continues Reddi. The rapid growth rate that Nigeria is expected to deliver has given rise to estimates that Nigeria’s economy will exceed that of South Africa’s by the end of the decade. Consequently, numerous South African based entities are considering a foray into the Nigerian economy, across many diverse industries.

"We believe that consideration of payment protection for goods delivered to Nigeria is vital,” concludes Reddi.

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