Business divestments and the imperative of economic reforms

…from the most perfunctory assessment of the state of the economy today, you could have your pick of why these businesses are divesting. On one hand, most have come under intense pressure from low-cost competitors…. On the other hand, failed government attempts to drive economic growth and bring down the domestic cost of doing business could be why these firms are leaving.

Unfavourable economic times compel a variety of coping responses from economic actors in the firing line. For folk whose wallet sizes have succumbed to the seduction of implacably rising prices, the trauma is less distressing than it is for persons who lost their jobs, as employers responded to the twin pressures of a rapidly shrinking market and vicious spikes in input costs. It helps that governments are able to alleviate these shocks, while putting in place policies to correct the distortions in the economy that produce them.

However, confronted by systemic shocks, the Nigerian state has always struggled. Not persuaded of the benefits of fiscal discipline, it never has the buffers — fiscal or monetary — to stimulate the economy in a crisis. Nor have we ever been blessed with the political nous to tell where politics end and policy kicks off in the design of economic intervention strategies.

Also Read: Nigeria In Trouble As TotalEnergies Plans To Divest Asset

What, if anything at all, is the net effect of all these? Two things. First, a national conviction that Nigeria is nearly always at the receiving end of a global conspiracy to do it grievous harm has developed on the back of the state’s weaknesses. This, ironically, is the result of two other impulses. On one hand, a sense of victimhood derived from straitened times, conspires with an exaggerated sense of the country’s importance (“The Giant of Africa”) and repurposes these grievances in terms of how the Western world’s dread of a resurgent Nigeria makes it inevitable that conspiracies abound to keep it bound, hand and foot. This exceptional circumstance shows up elsewhere, too. So unique is the domestic experience, the lead consensus goes, that orthodox suggestions for the growth and development of economies do not work for it.

The resulting search for home-grown solutions has taken an interesting turn of late. Look closely at the responses to recent news reports of businesses divesting from the economy. Almost without fail, a tiny but vocal cohort situates this in the “conspiracy against our economy” pigeonhole. And as is due those who would sabotage the economy, bans on subsequent imports of the outputs of any company that divests from the country have been suggested. Would this solution work? What does it matter? Nigeria is para-orthodox economics, anyway. And if the bans do not work, what greater evidence of the undermining effect of saboteurs of the economy could there possibly be?

…we could do the rational thing. Understand why the cost of doing business in Luanda is that much lower than in Lagos, and then aggressively drive the reforms needed not only to lower costs in Lagos, but to make our economy generally more competitive and productive.

Yet, from the most perfunctory assessment of the state of the economy today, you could have your pick of why these businesses are divesting. On one hand, most have come under intense pressure from low-cost competitors. These have made the prices of their goods unprofitable through mass market outlets in a country where the affluent are an endangered species. On the other hand, failed government attempts to drive economic growth and bring down the domestic cost of doing business could be why these firms are leaving. Either way, the domestic market is impoverished. There are limits to shrinkflation as a strategy for managing demand contraction.

Also Read: Only Investors With Technical, Operational Capabilities Can Takeover Assets Divested By IOCS–NNPC

Consider the possible facts behind divestment decisions. Business X produces Widget Y in two locations, Lagos, and Luanda, respectively. Both locations have different cost levels. And different levels of profit. These costs include both servicing and eventually repaying debts and paying dividends to shareholders. And because cross-border transactions take place, the costs preferably should cover a weighted aggregate for the business as a whole. Let us keep it simple. The weighted average cost of Business X is 10 per cent of the Lagos operation, to which operations there contributes 12 per cent by way of profit. The weighted average cost of Business X is 6 per cent of the Luandan operation, to which operations in that other city contributes 12 per cent by way of profit.

Why would Business X continue its Lagos operation? Is it a fast-growing sector, while the Luandan operations is a mature one? What is the challenge to politics and policy in Lagos, were Business X to relocate to an obviously more profitable Luanda? In a fit of pique, we could restrict all imports of Widget Y produced in Luanda, hoping that Business X cannot sell these profitably elsewhere. Or we could do the rational thing. Understand why the cost of doing business in Luanda is that much lower than in Lagos, and then aggressively drive the reforms needed not only to lower costs in Lagos, but to make our economy generally more competitive and productive.