Steep drop in business confidence in Q4

In most economies, Small and Medium Enterprises (SMEs) are regarded as the engine for growth. Based on data in the public domain, SMEs contribute over 50% to Nigeria’s GDP. However, a large portion is unrecorded as it falls within the country’s informal sector. Nigeria’s SME category has struggled for the past few years due to a reduction in demand for goods and services and a contraction in lending by banks and other financial institutions. These challenges can be traced to the slide in oil prices. 
The CBN’s Q4 2016 report on business expectations was released recently; it captured views from 1,950 business enterprises nationwide (95% were SMEs). 

The CBN’s Business Expectation Survey confidence index for Q4 2016 was -29.0 points (indicating respondents’ pessimism on the macro economy) compared with +8.3 points which was recorded in the corresponding period of 2015. 

Additionally, the survey also revealed that the average capacity utilisation index stood at -8.9 points in Q4 2016 compared with +10.5 points in the corresponding period of 2015.

The survey identified insufficient power supply as the major constraining factor to business activities in Q4 2016. Other factors were financial related; respondents expect inflation and borrowing rates to rise in both the current and next quarters.

Given that SMEs tend to be more labour intensive, they contribute significantly to employment. The survey also indicated that the wholesale/retail trade and construction sectors have prospects of improved employment in Q1 2017. Based on the national accounts by the NBS, these sectors contracted by -1.4% y/y and -6.1% y/y respectively in Q3 2016.

The federal minister of finance, Mrs Kemi Adeosun, recently disclosed that the establishment of a Development Bank is underway.  The bank is expected to begin operations by January 2017.

Essentially, this development bank will serve as a vehicle focused on channelling low-cost funds to SMEs with an initial start-off capital of US$1.3bn to provide support through microfinance banks and a few commercial banks.

We note, however, that aside access to finance and hardware infrastructure (transport networks, reliable power supply etc.), transparent regulation and policy consistency are also required to improve the business climate, and thus drive SME growth.

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