Credit freeze slows down businesses in Nigeria

The business cycle in Nigeria is currently suffering a depression, Bismarck Rewane, an economist and Managing Director, Financial Derivatives Company, said this during the November series of the Monthly Economic News and Views, at the Lagos Business School Executive Breakfast meeting.

“The consensus is that Nigeria is at the trough of the business cycle. The upside potential for a rapid recovery is predicated on a surge in oil price production and accommodative monetary policy,” Mr. Rewane said in his presentation, which was made available to NEXT on Thursday.

A depreciating business climate

According to Mr. Rewane, the 2009 slowdown is being exacerbated by the complete freeze on credit.

“The money centre banks have, all but put lending on hold thereby crimping most businesses. The absence of access to the debt capital markets and with equity markets in a hole, working capital has dried up.”

“A drying up of retail and consumer goods, producers confirm that sales growth declined in September and remained flat in October. Distributors in the main markets have seen inventories build up to six weeks of sales. Manufacturers have all confirmed that they are being forced to extend more credit to distributors,” he added.

By his calculations, there is a 60 per cent probability of a recovery, 20 per cent probability of a flat and 20 per cent chance of a steep recession. In spite of higher oil revenues, the risks of a sharp slowdown in economic activity remain high mainly due to contraction effect of the credit squeeze.

The Credit Crunch

In the August 2009 Central Bank of Nigeria report, aggregate credit to the private sector grew by 7.3 per cent to N9.68 trillion. In 2008, credit to the private sector grew by 59.38 per cent. According to Mr. Rewane, the growth is well below the debt service requirements arising from margin loans. Average recoverable outstanding is now higher to an average of 25 days.

‘No’ to help offer

Niall FitzGerald, the Co-chair and Chair of the Board of Investment Climate Facility (ICF) and Deputy Chairman, Thomson Reuters, told African journalists in London last week that Nigeria was not forthcoming nor embracing the offer for assistance to boost its harsh investment climate.

“What we do is work with African countries who are committed to change. If a country is not committed to change, we don’t work with them. In our two and half years of our existence, we now have over 25 projects in about 11 countries”.

Mr. FitzGerald stated that the finance body doesn’t just bump into countries. “We have a dialogue with the government and ask them... Would you like to do this? Are there other areas where you need help? And so far, Nigeria has stated that they do not need any help.”

Citing Rwanda, he explained that some other presidents in other countries are taking the ICF offer with great interest.

According to Mr. FitzGerald, the facility systematically focuses on areas where practical steps can be taken to remove identified constraints and problems. “If Africa becomes an easier and more attractive place in which to invest, everybody will benefit: business, government, and most importantly – the people of Africa.”

Omari Issa, Chief Executive Officer, ICF, stated in the company’s October newsletter, “We are particularly pleased to report that many of these projects are already delivering tangible improvements to businesses and investors across the continent. Since our inception, we have seen recognition of the importance of healthy investment climates steadily increase and we are encouraged by the increasing demand for ICF services from governments across the continent, many of whom should be commended for taking practical action to address and remove barriers to investment in their respective countries.”

The ICF is a Pan-African body explicitly and exclusively focuses on improving the continent’s investment climate. It works with receptive African governments, development and private sector partners, to systematically remove constraints to doing business.

Apart from finance struggles, other challenges that hinder businesses in Nigeria include issues of bureaucracy, regulation, and infrastructure, which analysts say are critical to long-term economic growth.