By Sunday Oladepo
Away from the customary regurgitations. Let me swerve from the business rhetoric that my column is dubbed after, and known for. But, I’m still going to be making business and economic sense. It’s a focus on Nigeria’s socioeconomic status under the Tinubu government. I’ll be analysing Tinubunomics using major metrics and how these analytics affect the growth of SMEs in Nigeria.
Followers of my column are already acquainted with my keen interest in the exploration and writing about SMEs. In my previous articles, I’ve concentrated my researches and discourses on how budding entrepreneurs can equip themselves with digital skills and knowledge to navigate Nigeria’s bumpy business terrain.
Nigeria’s business ecosystem presents a really tough terrain for SMEs, having numerous hurdles stunting their growth and sustainability. Whilst the country boasts a large market, diverse opportunities, and a youthful population, the metrics that define the SME landscape reveal significant impediments. Aside the dearth of innovative business ideas, which limits the scope for competitive ventures and stifles market diversity; many budding entrepreneurs struggle to differentiate their products and services, leading to a saturated market with little novelty.
Complicating the terrain are unfavorable government policies. From inconsistent regulations to excessive taxation and bureaucracy; the government’s approach to economic governance is often quoted as a significant barrier to SME growth. Policy instability: particularly FX matters and tax laws – creates uncertainty, making it difficult for SMEs to plan long-term and scale. Nigeria just celebrated her 64th anniversary of self-rule. I’ll be analysing the state of Nigeria’s economy and the implications of these statistics on SMEs.
Inflation Rate: 33.4% (mid 2024). This is sadly the highest in nearly 30-years and it’s primarily driven by food inflation arising from fuel subsidy removal and energy costs. This significantly affects the growth of SMEs because as inflation rises, the cost of raw materials, labor, utilities, and other inputs also rise. SMEs often operate with direct ratio of increased costs to increased sales. Hence, they find it hard to absorb these rising margins without passing them to customers. This, in turn, affects market competitiveness. Also, high inflation erodes the purchasing power of consumers, resorting to lower demand for goods and services. SMEs, which majorly rely on local consumers, are particularly vulnerable to this decrease in consumer spending.
Unemployment Rate: Approximately 33.3%. Youth unemployment is significantly higher at around 42.5%. A high youth unemployment rate implies that a significant fraction of the country’s population lacks disposable income. This reduces the overall consumer demand, especially in industries where SMEs depend on younger customers for sales (e.g., retail, entertainment, tech products, etc). High youth unemployment also discourages entrepreneurship among young people who often face financial constraints. Since many successful SMEs are owned by young entrepreneurs, fewer startups could emerge, which could limit overall innovation in the SME sector.
GDP Growth Rate: 3.19% (mid 2024). Geared up from 2.98% in the first quarter. A high GDP generally indicates economic growth, high income levels, and consumer confidence. This leads to increased demand for goods and services which also benefits SMEs by creating or expanding business opportunities. Comparatively, a low GDP stifles business growth, as nobody would be willing to invest in a kwashiorkored economy. In a low GDP economy, financial institutions are always gravely cautious to fund businesses, leading to strict lending conditions. This limits the ability of SMEs to secure aid for expansion or to weather tough times.
Exchange Rate: This is between ₦1,540 – ₦1,660 to $1 (as at September 2024 in the Investor and Exporter window). This is a significant depreciation after floating the naira. Fluctuations in exchange rates impact the profit margins of SMEs. If goods or materials are purchased from abroad, a sudden depreciation in the local currency would increase the cost of these imports, squeezing profit margins, unless the costs are directly passed onto consumers. Thus, SMEs that operate in international markets often adjust their pricing strategies in response to exchange rate fluctuations. Since the local currency is highly volatile, foreign investors hesitate to invest in SMEs due to the increased risk. This limits access to external funding and growth opportunities. Also, depreciation of the local currency leads to inflation, reducing consumer purchasing power, lowering domestic demand for the products and services offered by SMEs.
Foreign Reserves: Approximately $35 billion. Foreign reserves help stabilize a country’s currency by providing a buffer against the unpredictability and volatility of exchange rate. This is crucial for SMEs that rely on imports for raw materials or exports for market expansion. A stable currency reduces the risk of price fluctuations, making it easier for SMEs to plan and manage their costs. Great foreign reserves signal economic stability, making it easier for governments to borrow from international markets. This lowers interest rates within the country, making credit more accessible and affordable for SMEs. When interest rates are lower, SMEs can borrow to expand, invest in new technology, or hire more resources.
Public Debt: Total public debt is about ₦121 trillion. This includes both domestic and external liabilities, with domestic debt accounting for ₦65.65 trillion and external debt at ₦56.02 trillion. Debt-to-GDP ratio is 46.6%. The high domestic debt implies the government borrows heavily from local sources: banks and financial institutions. This translates to fewer available funds for private sector lending, including to SMEs. When government borrowing dominates the financial market, it can crowd out private borrowers, leading to higher interest rates, resorting to disinterest in lending to SMEs. As the government seeks to finance its debt, interest rates increase to make government securities more attractive to investors. This nosedives the cost of borrowing for SMEs, making it harder for them to access affordable credit to grow or expand.
Poverty Rate: About 40% of Nigerians live in abject poverty. With a significant portion of the population living below the poverty line, there’s a limited market for goods and services. SMEs rely on local demand but when the majority of potential customers can’t afford even basic products, it stifles business growth and limits revenue generation. Nigerians living in poverty are denied access to formal financial institutions. This means that SMEs often face difficulties in securing loans or investments. This is challenging in a country with weak financial infrastructure, where microfinance options may be the only accessible, yet insufficient, sources of capital. The high poverty rate in Nigeria constrains both the demand and the operational capacity for SMEs, limiting their potential for growth and contribution to the broader economy.
Interest Rate: Monetary Policy Rate (MPR) is 27.2%. With a high MPR, SMEs spend more on servicing loans, thereby shrinking their profit margins, thus reducing available capital for reinvestment and growth. SMEs may delay expansion plans due to the increased cost of capital. The high interest makes it less attractive to invest in new projects, hire staff, or purchase equipment, and decelerate business drive. The cost of financing innovation becomes high, forcing SMEs to focus on survival rather than expansion. A high MPR of 27.2% is likely to stifle the growth and expansion of SMEs in Nigeria by making borrowing more expensive, limiting access to credit, and increasing operational costs. These reduce profitability and hinder investment in innovation and expansion.
Foreign Direct Investment (FDI): Relatively low, around $1.5 billion annually. Low FDI inflows can lead to less integration with global supply chains. FDI exposes international markets by creating partnerships between local SMEs and multinational corporations. Without significant foreign investment, Nigerian SMEs may be kicked out of opportunities to tap into larger global markets. Low FDI can is also a reflection of low investor confidence in the country’s economic and political stability. If foreign investors are reluctant to invest, it signals to domestic entrepreneurs that the business ecosystem is risky, which may further discourage expansion and innovation within the SME sector.
With the above indices and exegesis – Nigerians, particularly the youths who’re into business or desiring to dive into business, can make fact-based opinions, decisions or policies that are business-sensical against mere political sentiments. This is Tinubunomics as it affects SMEs using critical indices.
I wish you the best in your legitimate hustles.
Sunday O. Oladepo is a journalist, PR/brand consultant, corporate communications expert and sociopolitical critic. He’s the editor-in-chief of jattsnews.com. You can shoot him an email via sunnexbobo@gmail.com
