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How important is the Ease of Doing Business to Nigeria?

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Thursday, November 09, 2017 / 9:40 AM /FDC 

Nigeria scaled up 24 spots in the Ease of Doing Business Index, moving from 169th (out of 190) to 145th on the rankings. The Ease of Doing Business is an index, developed by the World Bank, that scores and ranks countries based on how easy it is to set up and operate a business there.
 

Nigeria recorded progress in 8 out of 10 topics. Accordingly, Nigeria is amongst the 10 most improved countries for the 2018. The most notable increases were made in the ease of getting credit, enforcing contracts and dealing with construction permits topics.
 

The rising prominence of credit bureaus and the increased sophistication of the identity authentication system (Sim card registration, Bank verification number and national identity card) contributed to Nigeria’s jump in this index to 6 from 44.
 

This reduced the risk associated with lending, boosting credit availability. However, the net credit to the private sector from DMBs has contracted this year, due to high interest rates. This means that the large portion of credit available to businesses comes from Microfinance Banks and other nonbank financial institutions.
  

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Also contributing to this improvement is the effective implementation of the goals laid out in the Economic Recovery Growth Plan (ERGP). The move from traditional means of registering a company (with papers) has been replaced with online processes. New companies can confirm name availability, get all the information needed, and download and submit registration forms – all online!
 

Other notable changes are: introduction of the visa-on-arrival option, airport infrastructure development and the removal of baggage check post in the checking-in process.
 

Why is a business friendly environment so important?
The Ease of Doing Business is indicative of how favorable an economy is for business operations. These are important considerations for Foreign Direct Investors who are not only interested in the macro-economy but are also interested in the existing regulatory framework, policy and security. Essentially, these investors are interested in anything that can affect the success of their investments. 

This brings up the issue of competitiveness.
  

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When international organizations are looking to enter into a new region, they examine a wide range of variables such as size of potential market, and the ease of doing business. Investors are looking to avoid markets with a strong presence of politics & bureaucracy, coupled with high operating costs.

 

In West Africa, for example, Nigeria’s growing middle class may attract a global organization that manufactures and sells clothing. However, Nigeria’s poor score on ease of getting electricity and trading across borders could deter such an organization. Alternatively, Ghana, which not only performs better on these fronts, but also boasts of a stable exchange rate and faster economic growth (9% in Q2’2017), might prove a preferred market.

 

The above also applies to investments by domestic businesses. The tough regulatory environment forces businesses to stay small and in the shadows. This is one of the reasons why Nigeria has one of the largest informal economies.

 

Gross fixed investments make up 14.5% of Nigeria’s total GDP. Investments possess the multiplier effect that has the ability to affect other components of the national identity equation. For example, increased investments into domestic sectors with export potential could boost forex earnings and create more jobs. This could, in turn, have positive implications for private consumption.

 

In summary, the friendlier an economy is to business operations, the more attractive it is for investments, which is a vital catalyst of economic growth and development. Therefore, Nigeria’s rise in the Ease of Doing Business Index is laudable and positive for the recovery path.

 

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