Equipping Nigeria’s SMEs for African competition

Chris Uba

Now that the long-awaited African Continental Free Trade Area (AfCFTA) has formerly taken off it has become very necessary for Nigeria to build a virile Small and Medium Enterprises (SMEs) sector in order to maximize the benefits of the continental free trade. Nigerian-based SMEs must be well-packed to play big in the market.

AfCFTA is the world’s largest free trade area that connects almost 1.3billion people across 55 African countries. The agreement created a single market for goods and services in order to deepen the economic integration of Africa. The trade area is estimated to have a combined gross domestic product (GDP)  of around $3.4 trillion. The AfCFTA aims to reduce tariffs among members and covers policy areas such as trade facilitation and services, as well as regulatory measures such as sanitary standards and technical barriers to trade.

Nigeria requires a strong and resilient SME sector to compete favourably in the free trade area, especially, now, that the country is embarking economic diversification project.  SMEs play a major role in most economies, particularly in developing countries, accounting for the majority of businesses worldwide and are important contributors to job creation and global economic development. They represent about 90% of businesses and more than 50% of employment worldwide. Formal SMEs contribute up to 40% of national income (GDP) in emerging economies. These numbers are significantly higher when informal SMEs are included. 

The World Bank estimates that 600 million jobs will be needed by 2030 to absorb the growing global workforce, which makes SME development a high priority for many governments around the world. In emerging markets, most formal jobs are generated by SMEs, which create seven  out of 10 jobs.

 In Nigeria, the Central Bank of Nigeria (CBN), in its monetary policies circular No. 22 of 1988 ,defined SMEs as enterprises which have an annual turnover not exceeding N500,000. For the sake of clarity, the National Policy on Micro Small and Medium Enterprises (MSMEs) has given a clear distinction of enterprises, based on employment and Assets. SMEs are organisations which can best be described through their capital, scope and cost of projects, annual turnover, financial strength and number of employees amongst other things.

However, access to finance is a key constraint to SME growth; it is the second most cited obstacle facing SMEs to grow their businesses in emerging markets and developing countries. SMEs are less likely to be able to obtain bank loans than large firms; instead, they rely on internal funds, or cash from friends and family, to launch and initially run their enterprises. The International Finance Corporation (IFC) estimates that 65 million firms, or 40% of formal MSMEs in developing countries, have an unmet financing need of $5.2 trillion every year, which is equivalent to 1.4 times the current level of the global MSME lending. East Asia and Pacific accounts for the largest share (46%) of the total global finance gap and is followed by Latin America and the Caribbean (23%) and Europe and Central Asia (15%).

According to IFC, the gap volume varies considerably from region to region. Latin America and the Caribbean and the Middle East and North Africa regions, in particular, have the highest proportion of the finance gap compared to potential demand, measured at 87% and 88%, respectively. About half of formal SMEs do not  have access to formal credit. The financing gap is even larger when micro and informal enterprises are taken into account.

It is obvious that corona virus pandemic has seriously disrupted the world economy and continuing to ravage the existence of businesses. The SMEs are worst hit.  The pandemic crippled multiple businesses worldwide who are now looking to rebuild and get back to where they once were.  In Nigeria, since the pandemic begun, CBN has announced a N50 billion (US$ 128.5 million) targeted credit facility “to support households and micro, small and medium enterprises affected by the COVID-19 pandemic”. 

The House of Representatives on March 24, 2020 passed the Emergency Economic Stimulus Bill, to provide a 50 percent tax rebate for employers and business owners who agree to not make staff cuts in 2020.

This is not enough to prepare Nigerian SMEs for looming competition from other African countries.  Aside from Fidelity Bank Plc., and five other banks that have SMEs the rest are not supporting the sector. New findings contained in the PwC’s MSME Survey 2020 has revealed that Micro, Small, and Medium Enterprises do not rely on banks to meet the majority of their funding needs. Instead, they rely on their savings as well as friends and family.

 For now, access to credit facilities remains one of the biggest challenges facing MSMEs in the country. Information contained in chapter 4 of the 84-paged PwC  report revealed that many of the small businesses that participated in the survey resorted to starting their ventures with less than N50,000 initial startup capitals.

The report further revealed that only a paltry 4.7% of Nigerian MSMEs start their businesses with more than N300, 000 in initial capital costs. As much as 75% of small and medium businesses in the country start their ventures with less than N10 million. However, 6% of MSMEs start with more than N40 million.  Against this backdrop, therefore, it will be difficult the Nigerian SMEs to take full advantage of the benefits of AfCFTA.

Trade integration across the African continent has long been limited by outdated border and transport infrastructure and a patchwork of differing regulations across dozens of markets. Governments have often erected trade barriers to defend their markets from regional competition, making it more expensive for countries to trade with near neighbours than countries much further afield.

Intra-African exports were 16.6% of total exports in 2017, compared with 68.1% in Europe, 59.4% in Asia, 55% in America and 7% in Oceania, according to UNCTAD. Intra-African trade, defined as the average of intra-African exports and imports, was around 2% during the period 2015–17. The share of exports from Africa to the rest of the world ranged from 80% to 90% in 2000-17 – only Oceania had a higher export dependence on the rest of the world in that period.

Therefore, with AfCFTA, the World Bank estimates that by 2035, real income gains from full implementation of the agreement could increase by 7%, or nearly $450billion. By 2035, the volume of total exports would increase by almost 29% relative to business as usual. Intra-continental exports would increase by more than 81%, while exports to non-African countries would rise by 19%. The Bank predicts that the agreement could contribute to lifting an additional 30million  people from extreme poverty and 68million people from moderate poverty.

Last year, the Group Managing Director/Chief Executive of Zenith Bank Plc., Mr. Ebenezer Onyeagwu called for a concerted effort towards diversifying the country’s export base through the promotion of non-oil exports.

Onyeagwu said the onset of the COVID-19 pandemic which has impacted the demand for oil and, by extension, the price of crude oil in the international commodities market has further exposed Nigeria’s over-dependency on crude oil earnings and its susceptibility to oil-related shocks. He added that the events of the last couple of months have also highlighted the limited range of the country’s value-added products exported to foreign markets.

He noted further that boosting non-oil export is imperative in view of the opportunities that exist in the broader contexts of ECOWAS Trade Liberalisation Scheme and the African Continental Free Trade Area (AfCFTA) which seeks to create a continent-wide market of 1.2 billion people with combined Gross Domestic Product (GDP) of $2.5 trillion and about $4 trillion in consumer and business spending.

The Nigerian SME sector can fill this gap if it is adequately equipped. According to report by PwC, in Nigeria, SMEs contribute 48% of national GDP, account for 96% of businesses and 84% of employment. Despite the significant contribution of SMEs to the Nigerian economy, challenges still persist that hinder the growth and development of the sector.

According to the Nigeria Bureau of Statistics, SMEs in Nigeria have contributed about 48% of the national GDP in the last five years. With a total number of about 17.4 million, they account for about 50% of industrial jobs and nearly 90% of the manufacturing sector, in terms of number of enterprises.

 Though significant growth has been achieved in the MSME sector, says PwC,  there is still much to be done. It says “there still exists a ‘missing middle’, which finds it hard to access funds due to the category of funding they belong to.” Other challenges encountered by the sector include lack of skilled manpower, multiplicity of taxes, high cost of doing business, among others

Based on the above, there is need to conduct an evaluation of SMEs in Nigeria with the aim of unlocking growth and development of the sector in Nigeria. The evaluation will assist in attaining a status report on the level of effect or impact of the existing funding and other support strategies on the target recipients; as well as aid in driving policy assessment.

The Federal Government along with the state governments should  develop  policies that  support the growth of SMEs. This is very necessary enable them play both in African and global economies.