I’m no policy expert, but the African government has a default setting to result in Irresponsible public borrowing. This phenomenon has caused debt in many African countries to reach a crisis level.
Between 2010 till date, more than $80 billion in bonds have been issued to thirsty European investors by governments in Africa south of the Sahara. Currently, public debt now makes up about half of our GDP. Bilateral loans, especially from China, adds to the crisis.
Just last week, Fitch rating, a leading provider of credit ratings, commentary and research for the global capital market, warned that several countries in sub-Saharan Africa are in danger of slipping into a major debt crisis. Although Nigeria was not mentioned, it goes without saying that Nigeria is also a significant debtor in the global environment
The adverse effect of the debt crisis on the economic environment (and its implications for SMEs)
Every business operates within an economic environment and is therefore susceptible to feel any challenges the environment is facing
For startups and small businesses, even little changes in the fiscal policy of the government can send a business unit packing.
In this short article, we address the practical implications of the rising debt level in Nigeria on Small and Medium Enterprises (SMEs).
1. Desperate Fiscal Policy
Tax collection is a significant revenue generation medium for the Federal Government and state government. With the rise in debt level, we have seen the government aggressively tap into all revenue sources available to it.
Just between 2019 to 2020, the federal government has amended the finance bill that governs revenue collection. This has led to enforcement of Stamp duties, taxing digital spaces, among many other taxes and fees.
For SMEs, these desperate fiscal policy affects consumer demand, cost of doing business, investment decisions and the ability to compete.
2. Consumer Demand
In basic economics, consumption is a function of the disposable income of the citizen. Disposable income is that fraction of your income that is available for spending after tax has been deducted.
These rising public debts affect businesses by changing the amount of disposable income people need to spend on goods and services.
Higher taxes, or expansion of taxable items, lowers consumers’ net income, making them spend less or limit expenditures to necessities. Lower taxes leave more money in consumers’ pockets to spend on goods and services SMEs offer.
3. Cost of Doing Business
In a typical situation where the public debt level is on the rise, the government results in the sale of financial instruments such as bonds as a fiscal means to finance its spending. SMEs are also scouting for the same limited fund in the economy, and fundholders tend to redistribute their funds among alternatives to obtain the highest return on investment.
This usually tends to make interest rates on loans and credits to increase; therefore, businesses pay more for lines of credit. An increase in the cost of borrowing across the economy, coupled with excessive taxations, just put the cost of doing business for SMEs on the rise.
Next time the government wants to make a strategic decision on the ease of doing policy for SMEs, it is essential for the government to look at the implication of the rise in public debt on the viability of small businesses.