In 2018, Nigeria overtook South Africa as the largest economy on the continent. Nigeria’s economy that year was valued at $397 billion, while South Africa’s was valued at $366 billion. Part of this valuation stems from the fact that Nigeria is the largest oil producer in Africa, and one of the top oil exporters in the world, producing nearly 2 million barrels of crude each day.
Nigeria is the most populous country in Africa, with over 200 million people. About 65% of Nigerians are younger than 25. The population is vibrant, resilient, and hardworking. The country has 36 states (each administered by an elected governor), and a federal capital in Abuja. Nigeria consumes more than it can produce, which makes it a prime destination for exports. However, volatile oil prices influence the country’s performance, politically and economically.
According to the 2020 Index of Economic Freedom, Nigeria’s economy has been “mostly unfree” (in the context of “economic opportunity” and “individual prosperity”) since 2007, although it is gradually improving. The country’s “freedom score” is 57.2 (out of a possible 100) in the 2020 Index, which makes it the 116th “freest” economy in the world—so toward the middle of the pack (as there are 193 member states in the United Nations). Nigeria is ranked 14th in the Index, among the 47 countries classified as Sub-Saharan Africa. Nigeria also receives the third-most foreign direct investment (FDI) in Africa, behind Egypt and Ethiopia.
Nigeria’s agricultural sector employs nearly 70% of its citizens. Agricultural growth has yet to achieve its full potential, due to a continued insurgency in the northeast of the country and the perennial farmer-herdsmen conflicts that occur in most agricultural states. The shortcomings of the agriculture sector weaken prospects for underserved people in rural areas. Meanwhile, high food inflation adversely impacts the livelihoods of the urban poor.
Petroleum products account for more than 90% of Nigeria’s exports. Importing is cheaper than producing in Nigeria, due to certain problems the country is facing, such as declining infrastructure.
Nigeria is a middle-income and mixed economy, and an emerging market. The cost of doing business in Nigeria is very competitive, compared to similar markets in the world. According to the World Bank, Nigeria’s gross domestic product (GDP) grew at an average rate of 7% per year, between 2000 and 2014. Much of this growth was fueled by Nigeria’s export market. An oil price collapse (from 2014 to 2016), combined with negative production shocks, made the GDP growth rate drop to 2.7% in 2015. Nigeria experienced its first recession in 25 years in 2016, which caused the economy to contract by 1.6%. Although the economy recovered since then, the International Monetary Fund projects that it will contract by 5.4% this year, due to the pandemic.
The World Bank’s 2020 Ease of Doing Business report (which was released in October 2019) ranked Nigeria as 131st (of the 190 countries surveyed). This represents a climb of 15 places from its previous position. The report ranks countries against each other, based on how conducive the regulatory environment is to business operations, and how strong property right protections are. Economies with a high rank (1 to 20) are deemed “easier” to conduct business n. Nigeria recorded an improvement in six of the ten areas being evaluated: starting a business, dealing with construction permits, getting electricity, registering a property, trading across borders, and enforcing contracts.
It now takes just 24 hours (rather than the 10 days it used to) to register a business with the Corporate Affairs Commission (CAC). The CAC is an autonomous body charged with regulating the formation and management of companies in Nigeria. The reduced wait time is due to simplification of incorporation and payment processes. While the electricity supply has not really improved in Nigeria, it has become easier to get connected to the national grid. Currently, it takes around 30 days to get connected, as opposed to several months that was previously the norm.
Nigeria did not make significant strides in certain World Bank ranking metrics, such as: the payment of taxes, getting credit, resolving insolvency, and protecting minority investors. Since 2005, Nigeria has been one of Goldman Sachs’ “Next Eleven,” and consistently ranked among the “top” three destinations for foreign direct investment (FDI) in Africa in the 21st century. For instance, Nigeria’s FDI reached $98.73 billion in 2016, a 3% increase from 2015. While most of this investment has been directed to the oil and gas sector, FDI flows are diversifying.
One thing foreign investors should be aware of, though, are Nigeria’s multitude of taxes and levies. According to Tony Elumelu, the Chairman of Heirs Holdings, this has “killed” 95% of small and medium-sized enterprises (SMEs) in Nigeria. He has also implored the government to remove such disincentives, in order to give companies a better chance of survival in Nigeria.
Nigeria already has several incentives to assist foreign investors. The Nigerian Investment Promotion Commission (NIPC) was established via 2004 law, to encourage, promote, and coordinate investments in the Nigerian economy. 100% private and foreign ownership of companies is allowed in all sectors in Nigeria, except oil and gas.
Some of the main reasons to invest in Nigeria, stated by the NIPC, include:
Being the largest economy in Africa.
Fast growth prospects.
Large and growing population.
High-level commitment to improving the business environment.
Subnational doing-business reforms.
Two decades of political stability.
Significant natural resources.
Relatively low costs of labour.
Tax-based incentives for foreign investors are covered by later laws (not the 2004 one), and occur in various forms, such as: reliefs, credits, exemptions, allowances, breaks, and holidays. Although, as discussed earlier, Nigeria has a long way to go in this regard.
Nigeria has signed bilateral trade agreements with South Africa, South Korea, Italy, the Netherlands, Spain, China, Germany, Sweden, Switzerland, Taiwan, and the United Kingdom. Nigeria has also expressed interest in negotiating a trade deal with the United States. Meanwhile, the new African Continental Free Trade Area (AfCFTA) represents an opportunity to boost intra-African commerce, although Nigeria has yet to ratify it.
Many multinational companies that you are probably familiar with have significant operations in Nigeria, including:
Chevron: a California-based oil and gas firm with branches in over 180 countries, including Nigeria.
British Airways: the largest British airline in terms of fleet size, flights, and destinations.
Unilever: a consumer goods firm, one of the largest businesses in Nigeria.
P&G: Procter and Gamble, also in the consumer goods space, is one of the leading multinationals in Nigeria.
GSK: a British pharmaceutical giant established in 2000 by a merger between Glaxo Wellcome and SmithKline Beecham.
BAT: British American Tobacco is the world’s largest publicly-traded tobacco company.
Statistics show that 20% of SMEs fail in the first year, and 30% fail in the second year. By the fifth year, 50% of all SMEs fail. Meanwhile, in Nigeria, nearly 80% of SMEs fail within the first year. This shows that it is easy for businesses to go bust, especially in Nigeria, if they do not have a solid and well-planned structure. There are a variety of factors (some of which were mentioned earlier) that increase the failure rate of SMEs in Nigeria. However, some of those factors might not affect multinationals, as they tend to be better organized and funded than local entities. Regardless, no foreign company or entrepreneur can successfully enter Nigeria without a deep knowledge of market conditions and access to trusted partners and affiliates on the ground—which is where M74 comes into play.
Ifeoluwa Oseni is an intern at M74, and a recent graduate from the University of Ibadan in Nigeria, where he studied Computer Science. His interests include cybersecurity, politics, and technology. He loves telling stories of positive changemakers in Africa on his blog, InterviewStories.
This article is the second in the Why? Series of introductions to M74’s target markets.
The views expressed above are those of the author and do not reflect the official position of the M74 Group, which remains neutral on all matters. Publishers assume no liability for content.