A few weeks ago, we led a delegation of investors to Abuja and Lagos, where we met several high-ranking officials and C-level decision-makers in the private sector. Coming from all parts of the world, the delegation included a mix of foreign direct and foreign portfolio investors. We had the privilege of one-on-ones with the Vice-President, several Ministers, the Central Bank Governor and the heads of a number of government agencies, including the Securities and Exchange Commission (SEC) and the Debt Management Office (DMO).
At Renaissance Capital, we have always maintained that Nigeria’s future does not lie with oil. We were hence greatly encouraged by the high-quality government team that appears to be pushing hard for diversification. It was also refreshing to look at the country’s plans from the government’s perspective – rather than through the lens of the financial market, which at present can focus on little else other than the currency and oil prices. We believe the government is on-message and consistent about its top priorities: security, anti-corruption and the economy. There are no dreams of oil at $100/barrel – rather the opposite. Many decision-makers we met see low oil prices helping Nigeria force through reforms that will revitalise agriculture, encourage economic diversification and build a reliable budget revenue stream from the non-oil economy.
One of the administration’s goals that struck a chord with us, and to which we devote the majority of this piece, is the target for a top-100 place in the World Bank’s Ease of Doing Business (EODB) rankings. This much-less-talked-about goal is one that could have long-term positive consequences, should it be attained. Nigeria has a low 169th place today, similar to other oil exporters. Our initial assessment is that if Nigeria can echo what others in Sub-Saharan Africa (SSA) have done, 104th place is possible, and should it surpass what others have done, a 71st ranking is attainable.
On average, it takes one month to start a business in Nigeria, 908 hours to pay taxes, 10 weeks to register property and six months to get electricity. In Zambia, however, you can start a business in little over a week, while in Rwanda you can get electricity in just over a month. To register property in Nigeria, it can cost on average 11% of the property’s value. By contrast, in Rwanda it costs just 3%. Cross-border trade is particularly difficult – an exporter spends $786 on border compliance, vs just $143 in Kenya.
In constructing a roadmap to improvement, it needs to be stated that one issue with the kind of examples given above is that Nigeria, with a population of 178 million (versus 44 million in Kenya and 15 million or less in Zambia and Rwanda), may find it more difficult to enact reforms than smaller countries. One way to get around this will be for targeted reforms, focusing on a particular area that would have a large impact on Nigeria’s ranking.
To look at how Nigeria could improve its position, it is useful to understand how the EODB rankings are calculated. The ranking is derived from the overall distance to frontier (DTF), a measure which captures how far a country is from best practice in each sub-section of the rankings. One of the useful properties of the DTF is that you can accurately estimate the overall change by altering the component numbers, as the upper and lower bounds are not sensitive to new data. Under a best case, we think Nigeria could be ranked 71st in the world on EODB, with its DTF improving by almost half. In our view, this would involve focusing on the seven ‘low-hanging fruit’ areas of starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors and paying taxes. The risk we see is that Nigeria’s peers will also be continuing with reforms – the country may do everything right but still be left behind. However, Nigeria is starting from such a low base that its efforts should bring about positive changes regardless. We can also expect the most elementary lessons of economics to apply here – the law of diminishing marginal returns: the first 50 places will be relatively easy, the second 50 much less so.
No discourse on Nigeria today is complete without talk about the currency. We find it instructive to explore whether or not the current policy stance supports the three primary goals of this government. We fear that, at least, the anti-corruption goal is probably not compatible with current policy as it stands. Currency difficulties also deter foreign portfolio investors and are commonly cited by Nigerian companies as the primary obstacle to doing business.
Temi Popoola is Chief Executive Officer (Nigeria), Renaissance Capital
