Factors Affecting Business in Nigeria.
Are you planning to do business in Nigeria? Or have you started your business in Nigeria and you seem not to understand the business terrain? This article will x-ray the macro economic variables in Nigeria and how they affect businesses. The tool I am going to use to analyse the business environment in Nigeria is PESTEL Analysis. For people that are not familiar with PESTEL, it is an acronym for Political, Economic, Social, Technological, Environmental and Legal factors. These factors play important roles in determining whether a business will succeed or not. Therefore, it is expected that entrepreneurs should endeavour to scan his business environment before major investment is made. Major investment may mean that you want to start a new business in Nigeria or you want to expand an existing business. Whatever the case may be, this PESTEL Analysis will give you a clue of how the business environment in Nigeria looks like.
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For more than fifteen years now, Nigeria has been operating under uninterrupted civilian governments. Nigeria operates a multi-party system with more than ten political parties. However, there are only two dominant political parties, one playing the role of opposition party. The current ruling party has majority seats in both upper and lower chambers of the legislative arm of government. Within this period of democratic dispensation, there have been changes in governments. The last change of government which took place last year was equally a change in ruling political party. The term of government is four years. Therefore, by 2018, Nigerians will be preparing for another election. For anybody that wants to do business in Nigeria, I like to quickly point out that elections here are generally characterised by much spending. Therefore, businesses involving media and printing usually record huge turnover during this period.
For contractors, election year may not be the right time to secure a contract except you are sure of getting your contract fee paid before the election is over. The reason is that, there is tendency for the existing projects to be discontinued if there is a change in government. This situation can be worse if power changes hands to another political party. New governments usually like to pursue their own agenda which may be totally different from the agenda of the previous government.
Politically, Nigeria seems to be stable except for the uprising of the terrorists in the Northern part of the country. Also, another faction in the South-South agitating for their rights over the oil revenue may make the business in that area to be volatile. There has been series of oil pipes vandalization across the oil rich cities in Nigeria.
Nigeria Corruption Perception Index as reported by Transparency International based on the 2015 report stood at 26 points. This puts Nigeria at No. 136 least corrupt nation out of 175 countries. With this among other factors, the business confidence in Nigeria in the first quarter of the 2016 as reported by the Central Bank of Nigeria has plummeted to -10.30. Nonetheless, the current government administration seems to be fighting corruption and a lot of looted government funds are being recovered. The government is also seeking the supports of the international community in ensuring that looted funds deposited in foreign countries are repatriated.
Government Policy: The government of the day seems to realise the need for Nigeria to diversify its economy. Therefore, agriculture is one of the sectors that is receiving much attention. Nigeria is blessed with fertile soil and several mineral resources. Therefore, anyone that want to explore this area will definitely enjoy the backing of the government.
Currently, the economic situation in Nigeria is not that buoyant. Nigeria as a country has been a mono-economy with total dependence on oil revenue. With the current glut in the oil market, the revenue coming to the country has come down drastically. Because Nigeria operates a federalism system of government with three tiers of government namely; Federal, States and Local Governments, revenue has to be shared across the three tiers of government. With the shrunk revenue, the money coming to the States and Local Governments is not enough to finance their recurrent expenditure let alone capital expenditure. Unfortunately, most States in Nigeria cannot boast of tangible internally generated revenue. Therefore, some of them are unable to pay workers’ salaries leading to four to five month salary arrears. The resultant effect is the lack of disposable income for the citizenry. Therefore, this is not the time for the purchase of luxury items. People will like to spend their little available resources on basic needs, especially food items.
Another economic factor one may need to consider is the level of unemployment in Nigeria. Youth unemployment rate is put at 21.5 %. The economic implication of this is that, this can lead to crimes and other social vices. We all know that an idle hand is a devil’s workshop. On the other hands, this means that entrepreneurs can have access to cheap labour. It will be cost effective for any labour intensive business to be located in Nigeria. Alternatively, it will benefit foreign countries to outsource any labour intensive arm of their business to Nigeria.
Cost of borrowing is quite high in Nigeria. Even though Central Bank of Nigeria tried to peg interest rate at 12%, you still discover that borrowers may pay minimum of 15% when other costs such as management and procession fees are added to it. If you want to borrow to do business in Nigeria, you need to be sure that the margin will be able to cover the interest. In our country where only few companies comply with credit policies, the interest payment may escalate beyond your cash flow projections by the reason of the delay in payment from your customers.
Forex: The foreign exchange rate is quite high when measured against major currencies. The official rate stands at N199 to $1 as at the time of writing this article. To worsen the situation, Forex is not available for people who want to transact business in foreign currencies. Therefore, parallel market is the option left available. And this is as high as N360 to $1. This is not good for a country that imports almost everything. For few companies that export their products to foreign countries, this is a booming period for them.
Inflation: Due to the high exchange rate, there has been steady rise in the prices of consumer goods thereby causing inflation rate to rise too. Inflation rate that was 9.6% in January 2016 has climbed to all high 15.6% as at May 2016. With this level of inflation in Nigeria, individuals and businesses are beginning to cut down their budgets.
Infrastructure: Jokingly, someone said that everyone is a Local Government on his own. That is just the truth. If you want to do business in Nigeria, you should be ready to provide water and power by yourself. Any business that wants to depend on electricity will be grounded as the level of power supply in Nigeria is generally poor. You need to buy a sizable power generating set that will be able to carry your appliances. If you run a manufacturing company, cost of fuel will be one of your major overheads. In most cases, you discover that imported goods are cheaper than locally made goods. This is actually killing manufacturing companies in Nigeria.
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Population: Nigeria has an estimated population of 181.56 million people as at July 2015. It has the highest population in Africa and it ranks No. 7 in the whole world. That is why Nigeria is being referred to as the giant of Africa. The market potential here is very huge. In the past years, despite the instability in the country, foreign direct investment has been on the increase. For instance, the investment in the Telecommunication industry has been very huge. As of April 2016, Nigerian Communications Commission reported 147.57 million active numbers. The size of the population is enough to attract investors into the country.
Ethnic/Religion: Nigeria is diversified in term of ethnicity and religion. Nevertheless, we still celebrate our unity in diversity. Doing business in Nigeria requires that you understand the religion and cultural values of each group. Religion is very pronounced in Nigeria and it is a very sensitive issue. The two major religions in Nigeria are Christianity and Islamic. You are not forced to belong to any religion but you need to respect individuals for the religion group they belong to.
Fashion/Brand Preferences: An average Nigerian likes fashion. In some cases, we like spending on frivolous things. Average Nigerians will spend money on anything that appeals to his/her interest. For instance, despite the fact that most people in Nigeria live below poverty line, record has it that Nigeria is still one of the bestselling markets for Smartphones in the world. If your product is trending, you can be sure that it will sell in Nigeria. Although you may need to spend few bulks on advertisement in order to create awareness. If you sell products in packs, it won’t be long before you discover that smaller packs with small price tag sell more and faster. This is the reflection of income level of the populace.
Unlike before, Nigerians are fast becoming computer savvy. A large number of Nigerian youths are computer literate. Although, laptops and personal computers still remain a luxury to some people, the use of Smartphones seems to be bridging this gap. With Smartphones, many people are now active users of internet with social media presence. We now have estimated number of 86.22 million internet users giving a penetration of 46.10% of the population. Therefore, for anyone that want to do business in Nigeria, online adverts are actually becoming a popular way of reaching targeted customers.
In Nigeria, the law stipulates eighteen thousand naira per month as the minimum wage. Notwithstanding, you still find a lot of organisations including governments paying the amount that is less than the minimum wage. This is possible because of the stiff competition in the labour market due to the high rate of unemployment in the country.
Tax laws: Nigeria operates progressive tax system for Personal Income Tax. The more a person earns, the more he is expected to pay as tax. On average, personal income tax hover around twenty four per cent. Company Income Tax rate is thirty per cent while Value Added Tax is five per cent. With the dwindling oil revenue, government is now trying to block all the leakages in the revenue coming from taxation. Therefore, the era of tax evasion may soon become the thing of the past. Any company that wants to operate business here should prepare to comply with applicable tax laws. Otherwise, such company may be asked to pay penalties if discovered that it has not been paying accurate taxes. Federal Inland Revenue Service now operates integrated tax system which made tax evasion almost impossible. Before any company can open a bank account in Nigeria, it is expected that it must have registered with the Federal Inland Revenue Service. Upon registration, Federal Inland Revenue Service will issue the company a Tax Identification Number. Any company that want to open a bank account is expected to provide the bank with the Tax Identification Number.
The Federal Government of Nigeria plays crucial role in protecting the ecology of the country. In addition, each State is empowered to formulate laws or policies that will ensure that the environment is clean in order to prevent the outbreak of diseases.
Due to the lack of electricity, the level of noise and air pollution coming from power generating sets is high. This affects residential, commercial and industrial areas respectively.
This PESTEL Analysis is subject to change as the business environments keep changing. This will only serve as a guide as it relates to the present circumstances. If you need to carry on Business in Nigeria, it is important you carry out your own analysis before you conclude on the feasibility of your project.