Small and medium-sized enterprises (SMEs) are the backbone of Nigeria’s economy. They contribute nearly 48% of the national GDP and employ over 80% of the country’s workforce. These businesses are a key driver of innovation, local job creation, and economic growth.
However, recent changes in government policies aimed at boosting revenue, stabilizing inflation, and reforming currency systems have placed a heavy burden on SMEs. Tax hikes, rising operational costs, credit access challenges, and regulatory hurdles are straining their ability to thrive.
How Nigeria’s Economic Policies Are Impacting Small Businesses
Here’s a breakdown of the challenges and what lies ahead for SMEs in Nigeria.
1. Higher taxes squeeze small businesses
Tax reforms are among the most impactful changes for SMEs. The government has increased Value Added Tax (VAT) from 5% to 7.5% and introduced additional levies, such as excise duties. While these measures are designed to increase government revenue, they translate into higher operational costs for small businesses operating on tight budgets.
A 2023 report by the Nigerian Association of Small and Medium Enterprises (NASME) found that over 60% of SMEs struggled to meet new tax obligations. The cumulative tax rate for businesses in Nigeria now stands at 34.8%, one of the highest in West Africa.
Unlike large corporations with resources to manage these costs, small businesses are finding it financially draining to comply. Many are forced to either cut back on expenses, pass the costs to consumers, or face penalties for non-compliance.
2. Currency fluctuations and inflation pinch import-dependent SMEs
The decision by the Central Bank of Nigeria (CBN) to allow the Naira to float against major currencies was intended to stabilize the currency and attract foreign investments. However, the sharp depreciation of the Naira, reaching as high as ₦950 to $1 in mid-2024, has brought challenges for businesses reliant on imports.
For SMEs sourcing raw materials or equipment from abroad, the steep costs of imports have disrupted operations. Inflation, driven by these rising import prices, hit 25.8% in September 2024, according to the National Bureau of Statistics (NBS). SMEs have been left with no choice but to increase prices, which has reduced consumer purchasing power and further slowed demand for goods and services.
3. Costly credit and financing barriers
Affordable credit is the lifeline of SMEs, yet access to financing has become increasingly difficult. To combat inflation, the CBN raised the Monetary Policy Rate (MPR) to 20.5%, causing commercial banks to increase lending rates, with some charging up to 35% interest on loans. This makes borrowing nearly impossible for most small businesses.
According to the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN), more than 75% of SMEs lack access to formal credit. While government-backed initiatives like the CBN’s Anchor Borrowers’ Programme aim to bridge this gap, these schemes often fall short due to oversubscription and strict qualification criteria. Many small businesses are left without the funds needed for expansion, inventory purchases, or even day-to-day operations.
4. Rising compliance costs and regulatory challenges
The cost of navigating Nigeria’s regulatory landscape is another major hurdle for SMEs. Stricter import restrictions, licensing fees, product certifications, and environmental compliance requirements have driven up operational expenses.
Although some SMEs are adapting by sourcing raw materials locally, this is not always a viable alternative. Local suppliers may lack the capacity to meet quality or quantity demands, creating supply chain issues. Furthermore, inconsistent enforcement of regulations leads to an unpredictable business environment, making it hard for SMEs to plan and operate efficiently.
Ripple Effects: Unemployment and Reduced Community Engagement
The struggles of SMEs are creating broader economic challenges. Many small businesses are scaling back or closing, leading to higher unemployment. The NBS estimates that the unemployment rate could reach 37.4% by the end of 2024, up from 33.3% in 2022. This decline in jobs reduces consumer spending, creating a vicious cycle of low demand and poor business performance.
Additionally, SMEs that previously supported local communities or ran social programs have had to scale back, reducing their positive impact on regional development. This is particularly noticeable in rural areas where small businesses often play a critical role in community support.
What Can Be Done?
Despite these challenges, there are steps that can be taken to improve the situation for SMEs:
- Simplify tax processes
The government could reduce the tax burden by streamlining processes and offering relief for small businesses. Tax incentives for startups or micro-enterprises could encourage growth while maintaining compliance. - Support affordable credit
Expanding access to affordable financing, such as lower interest loans or grants, is crucial. Government schemes must be made more inclusive, with simpler application processes and wider reach. - Address inflation and currency stability
Stabilizing the currency and curbing inflation through targeted policies will help businesses control costs and plan for growth. - Reduce regulatory bottlenecks
Easing licensing and compliance requirements could reduce costs and create a more predictable environment for SMEs. - Encourage local sourcing innovations
Investing in local industries to improve the quality and supply of raw materials will help businesses adapt to import restrictions more effectively.
Looking Ahead
Small businesses are at the heart of Nigeria’s economy, but the recent economic policies have left many struggling to stay afloat. While some government interventions provide relief, they fall short of reaching the majority of SMEs that desperately need support.
Policymakers must find a balance between revenue generation and economic inclusivity. Ensuring that small businesses are supported will not only help them survive but also strengthen the Nigerian economy as a whole. For SMEs, this support could mean the difference between closing their doors and thriving in the face of adversity.
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