Kick-starting Nigeria's Economy through the SMEs

The definition of Small and Medium-sized Enterprises (SMEs) varies around the world. According to the Bank of Industry, SMEs are businesses that have 200 or fewer employees, NGN500mm or less in total assets and annual turnover of NGN500mm or less. Regardless of the definition, or country they reside, SMEs collectively serve as the engine for growth and development in the world. In Nigeria, PriceWaterhouseCoopers (PWC) states that SMEs are responsible for 48% of national GDP, 96% of businesses and 84% of employment.

 

In 2018, Nigeria surpassed India in terms of the number of people living in poverty, despite India having a population that is seven times more. The number of people living in poverty in Nigeria will rise from an estimated 82 million due to the impact of COVID-19 pandemic on the economy. According to the Nigerian Bureau of Statistics (NBS), the economic growth could fall by as much as minus 4.40% to minus 8.91%. This decline is dependent on the length of the lockdown, the effectiveness of economic measures and importantly, the amount of stimulus spending by the government.

 

The Economic Sustainability Committee (ESC), has recommended a stimulus package of NGN2.3 trillion. In context, the average stimulus package as a percentage of GDP stands at 21% in Japan, 13% in the United States and 10% in South Africa. In comparison, the proposed stimulus package will put that figure at a mere 1.5% for Nigeria. Therefore, the government will need to ensure that some critical policies are put in place to support the stimulus package further. 

 

One of the avenues the government can utilise towards limiting the impact of COVID-19 on the economy are the SMEs. According to a survey conducted by PWC, electricity cost and rent are the highest costs SMEs have to bear during operations. Other expenses include the cost of capital, employee-related costs, taxes, transportation and debt servicing costs. These costs go a long way in impacting profitability, business expansion, cross-border competitiveness and the economy at large.

 

My proposal to the government is the development of Special Economic Zones (SEZs) around the country for SMEs. These SEZs should provide essential services and tackle fundamental challenges such as an agreed minimum power supply daily, subsidised and flexible rental plans, tax and business advisory units and other essential services that can support SMEs. In essence, the SEZs need to be tailored to tackle the challenges faced by SMEs in Nigeria. Importantly, these SEZs also need to be implemented in collaboration with the state governments and possibly renowned consultancy firms, which can provide the relevant expertise backed up by data. These SEZs are expected to differ from one region to another, as the law of comparative advantage should apply. 

 

In the immediate, state governments can explore partnerships with power distribution companies (Discos), where the Discos can focus on satisfying specific locations in states where SME clusters exist. There are various ways the government can implement this strategy. For example, providing electricity for 5 hours on every workday, or for 8 hours three to four workdays a week. However, the poor implementation of town planning across the country may limit the effectiveness of this strategy.

 

A report by the IMF states that the inadequate supply of power costs the economy an estimated $29bn yearly. This figure is approximately 7% of the country's entire GDP. Furthermore, Nigerians spend around $14bn to generate electricity through alternative means for their businesses annually. One can only begin to imagine the impact on the economy if the government can solve this problem.

 

Considering the debt position of the country, volatility in oil prices, slow diversification of the country's economy, it is clear that the government will need to come up with effective and practical strategies to rescue the country and spur growth going forward. 

 

To have an idea of challenges faced by SMEs in Nigeria: Kindly read the PWC's MSME Survey 2020 - Building to Last. 

 

https://www.pwc.com/ng/en/publications/pwc-msme-survey-2020.html