NIGERIA – AN ECONOMIC OVERVIEW
- OVERVIEW
Nigeriaofficially the Federal Republic of Nigeria, is a federalconstitutional republic comprising 36 states and its Federal Capital Territory, Abuja. The country is located in West Africa and shares land borders with the Republic of Benin in the west, Chad and Cameroon in the east, and Niger in the north. Its coast in the south lies on the Gulf of Guinea on the Atlantic Ocean. There are over 500 ethnic groups in Nigeria, of which the three largest are the Hausa, Igbo and Yoruba.
The name Nigeria was taken from the Niger River running through the country. This name was coined by Flora Shaw, who later married Baron Lugard, a British colonial administrator, in the late 19th century. The British colonised Nigeria in the late nineteenth and early twentieth century, setting up administrative structures and law while recognizing traditional chiefs. Nigeria became independent in 1960.
Nigeria, known as "the Giant of Africa", is the most populous country in Africa and the seventh most populous country in the world. Its oil reserves (36.2 billion barrels of oil and 1.84 trillion Cubic Feet of natural gas) have brought great revenues to the country. It is listed among the "Next Eleven" economies. Nigeria is a member of both the Commonwealth of Nations, and the African Union.
Nigeria is the 12thlargest producer of petroleum in the world and the 8th largest exporter, and has the 10th largest proven reserves. (The country joined OPEC in 1971). Petroleum plays a large role in the Nigerian economy, accounting for 40% of GDP and 80% of Government earnings.
Nigeria has one of the fastest growing telecommunications markets in the world, major emerging market operators (like MTN, Etisalat, Zain and Globacom) basing their largest and most profitable centres in the country. The government has recently begun expanding this infrastructure to space based communications. Nigeria has a space satellite which is monitored at the Nigerian National Space Research and Development Agency Headquarters in Abuja.
The country has a highly developed financial services sector, with a mix of local and international banks (7 Banks rank among top 1000 Banks in the worldand 3 Banks rank among top 20 Banks in Africa), asset management companies, brokerage houses, insurance companies and brokers, private equity funds and investment banks.
Nigeria also has a wide array of underexploited mineral resources which include natural gas, coal, bauxite, tantalite, gold, tin, iron ore, limestone, niobium, lead and zinc. Despite huge deposits of these natural resources, the mining industry in Nigeria is still in its infancy.
Agriculture used to be the principal foreign exchange earner of Nigeria. At one time, Nigeria was the world's largest exporter of groundnuts, cocoa, and palm oil and a significant producer of coconuts, citrus fruits, maize, pearl millet, cassava, yams and sugar cane. About 60% of Nigerians work in the agricultural sector, and Nigeria has vast areas of underutilized arable land.
It also has a manufacturing industry which includes leather and textiles (centred Kano, Abeokuta, Onitsha, and Lagos), car manufacturing (for the French car manufacturer Peugeot as well as for the English truck manufacturer Bedford, now a subsidiary of General Motors), t-shirts, plastics and processed food.
- ECONOMIC INDICES
Independencefrom the United Kingdom - 1 October, 1960
Became a Republic - 1 October, 1963
Currency -Naira (N) (NGN)
Official languages - English
Major languages - Hausa, Igbo and Yoruba
- Area
Total- 923,768km2(Water-1.4%)
356,667sqmi
- Population
2013estimate 174,507,539
2006census 140,431,790
- Density - 188.9/km2
489.3/sqmi - GDP(PPP) - 2013estimate
Total - $485.194billion
Per capita - $2,866
- GDP(nominal) - 2013estimate
Total - $289.885 billion
Per capita - $1,712.433
- Inflation rates(from Sep, 2012 to Aug, 2013)
Max = 12.3, Min = 8.2
Current Inflation rate = 8.2 - The external reserve - 2013
US$48billion
- The Stock Market Capitalization - June 18, 2013
N11.91trillion
- The foreign exchange–as at 21st August, 2013
N155.76/US Dollar
- INVESTMENT OPPORTUNITIES
•Investment Opportunities exist in all sectors of the economy, especially:
- Power – Generation, Transmission & Distribution
- Oil & Gas (extractive and non-extractive)
- Agriculture & Agro Allied
- Port Management
- Mass Transportation – Road, Rail, Air and In-land Water Ways
- Aviation
- Information & Communication Technology (ICT)
- Health Services
- Solid Minerals
- Banking & Financial Services
- Tourism /Hospitality
- Manufacturing - Pharmaceuticals, Textiles & Garments, Automobiles, Iron & Steel
- Education
- Waste Management & Treatment
- INVESTMENT INCENTIVES IN NIGERIA
General Incentives
- COMPANIES INCOME TAX
The Companies Income Tax Act has been amended in order toencourage potential and existing investors and entrepreneurs. The
current rate in all sectors, except for petroleum, is 30 percent.
- PIONEER STATUS
The grant of Pioneer Status to an industry is aimed at enabling the
industry concerned to make a reasonable level of profit within itsformative years. The profit so made is expected to be ploughedback into the business.
Pioneer status is a tax holiday granted to qualified or (eligible)industries anywhere in the Federation and sevenyeartax holiday inrespect of industries located in economically disadvantaged local
government area of the Federation. At the moment, there is a list of69 approved industries declared pioneer industries, which can
benefit from tax holiday.To qualify, a joint venture company or a wholly foreignownedcompany must have incurred a capital expenditure of not less thanfive million Naira whilst that of qualified indigenous company shouldnot be less than N150, 000.00. In addition, an application in respectof Pioneer Status must be submitted within one year the applicantcompany starts commercial production otherwise the application willbe timebarred.
- TAX RELIEF FOR RESEARCH AND DEVELOPMENT
Industrial establishments are expected to engage in Research andDevelopment (R&D) for the improvement of their processes andproducts. Up to 120 percent of expenses on (R&D) are taxdeductible, provided that such R&D activities are carried out inNigeria and are connected with the business from which income orprofits is derived. Also, for the purpose of R&D on Local rawmaterials, 140 percent of expenses are allowed. Where theresearch is longterm,it will be regarded as a capital expenditureand will be written off against profit. The result of such researchcould be patented and protected in accordance with internationallyaccepted Industrial Property Rights.
- CAPITAL ALLOWANCES
Theamount of capital allowance to be enjoyed in any year ofassessment is restricted in Nigeria to 75% of assessable profit incase of manufacturing companies and 66% in case of others, exceptsuch companies in agroalliedindustries that are not affected by thisrestriction. If leased assets are used in agroalliedventures, the full(100%) capital allowance claimed will be granted. Moreover, wherethe leased assets are agricultural plants and equipment, there willbe an additional investment allowance of 10% on such expenditure.
- INPLANT TRAINING
This is applicable to industrial establishments that have set upIn planttraining facilities. Such industries enjoy a two percent taxconcession for a period of five years.
- INVESTMENT IN INFRASTRUCTURE
This is a form of incentive granted to industries that provide facilitiesthat ordinarily, should have been provided by government. Suchfacilities include access roads, pipe borne water and electricity.
Twenty percent (20%) of the cost of providing these infrastructuralfacilities, where they do not exist, is tax deductible.
- INVESTMENT IN ECONOMICALLY DISADVANTAGEDAREAS
Without prejudice to the provision of the pioneer status enabling law,a pioneer industry sited in economically disadvantaged LocalGovernment Area is entitled to 100% tax holiday for seven yearsand an additional 5% capital depreciation allowance over and abovethe initial capital depreciation allowance.
- LABOUR INTENSIVE MODE OF PRODUCTION
Industries with high labour/capital ratio are entitled to taxconcessions. These are industries with plants, equipment andmachinery, which essentially are operated with minimal automation.
Where there is automation, such automation should not be more
than one process in the course of production. The rate is graduatedin such a way that an industry employing 1,000 persons or more willenjoy 15 percent tax concession, while an industry employing 200will enjoy 7 percent and those employing 100 will enjoy 6 percentand so on.
- LOCAL VALUE ADDED
10% tax concession for five (5) years. This applies essentially toengineering industries, where some finished imported productsserves as inputs. The concession is aimed at encouraging localfabrication rather than the mere assembly of completely knockeddown parts.
- REINVESTMENT ALLOWANCE
This incentive is granted to companies engaged in manufacturingwhich incur qualifying capital expenditure for the purposes ofapproved expansion, etc. The incentive is in the form of ageneralized allowance of capital expenditure incurred by companiesfor the following:-
•Expansion of production capacity
•Modernization of production facilities
•Diversification into related products
The government within the past few years has introduced a number of measures designed to promote investment. Some of these measures include:
i. Fiscal measures on taxation
ii. Effective protection of local industries with import tariff or outright ban on importation of locally available substitutes;
iii. Export promotion of Nigerian-made products; and
iv. Foreign currency facility for international trade.
Some of the specific incentives are categorized as follows:
- Export Incentives: Retention of export proceeds in foreign
currency:
Exporters of Nigerian commodities are obliged to open a foreign currency domiciliary account (D/A) with an authorized bank of its choice in which 100% of the proceeds of such exports may be credited in foreign currency.
- Export Development Fund (EDF)
The Export Development Fund (EDF) is a special fund set up by the government to provide financial assistance to private sector exporting companies to off-set part of their initial expenses in respect of certain export promotion activities. These are promotional activities and the conditions for eligibility are as outlined by the Nigerian Export Promotion Council (NEPC).
- Export Adjustment Fund Scheme:
This scheme serves as supplementary export subsidy to compensate exporters for the high cost of local production arising mainly from infrastructural deficiencies and also other natural and negative factors beyond the control of the exporter.
- Tax and Other Incentives:
- Export oriented industries:
- Export oriented industries that export not less than 60% of their product can enjoy 10 percent tax concession for five years.
- Excise duty:
- In order to boost local industries, stimulate trade and reduce cost, government abolished most excise duties since 1st January 1998.
- Capital Assets Depreciation Allowance:
- The Law in Nigeria provides an additional annual depreciation allowance of 50% on plant and machinery to manufacturing exporters who exports at least 50% of the value of their annual turnover provided that the product has at least 40% local raw materials content or 35% value added.
- Pioneer Status:
- The provision of the Industrial Development (Income Tax Relief) Act with respect to Pioneer Status tax holidays applied to any manufacturing exporter who exports at least 50% of his annual turnover.
- Companies with small or no profits in Agro allied business are exempted from paying minimum tax of 20%
Sectoral Incentives
Industry
(a) Companies with turnover of less than N1 million aretaxed at a low rate of 20% for the first five years ofoperation if they are in the manufacturing business.
(b) Dividend from companies in manufacturing sector withturnover of less than N1 million is taxfreefor the firstfive years of their operation.
(c) Dividends derived from manufacturing companies inpetrol chemical andchemical and liquefied natural gas subsectorareexempted from tax.
Employment Tax Relief
- Any company with a minimum net employment of ten employees of which 6% are employees without any form of previous work experience within 3 years of graduating from school or any vacation within the assessment period shall enjoy an exemption from income tax of 5% of its assessable profits in the assessment period in which the profits were generated.
- Any company with a minimum net employment of 5 new employees and retains such employees for a minimum of 2 years from the year of assessment in which the employees were first employed shall enjoy an exemption from income tax of 5% of its assessable profits in the assessment period in which the company qualifies
Infrastructure Tax Relief
- Any company that incurs expenditure on infrastructure or facilities of a public nature shall be entitled to an exemption from income tax of an additional 30% of the cost of the provision of the infrastructure or facilities in the assessment period in which the infrastructure or facilities were provided e.g Power (electricity); Roads/Bridges; Water; Health, Educational and Sporting facilities
Minimum Local Raw Materials Utilization
A tax credit of 20% is granted for five years to industries that attain
the minimum level of local raw material sourcing and utilization. Theminimum levels of local raw materials sourcing and utilization bysectors are:
•Agroallied70%
•Engineering 60%
•Chemicals 60%
•Petrochemicals 70%
Oil and Gas Sector
In view of the enormous potentials in this sector, some fiscal incentives have been put in place by the government for investors as follows:
Gas Production Phase
•Applicable tax rate under the Petroleum Profit Tax (PPT) Act to be at the same rate as company tax currently at 30%.
•Capital Allowance at the rate of 20% per annum in the first four years, 19% in the fifth year and the remaining 1% in the books.
•Investment Tax Credit of the current rate of 5%.
•Royalty at the rate of 7% on shore and 5% offshore.
Gas Transmission and Distribution
•Capital allowance as in production phase above.
•Tax rate as in production phase.
•Tax holiday under pioneering status.
LNG Projects
•Applicable tax rate under PPT is 45%.
•Capital allowance is 33% per year on straight-line basis in the first three years with 1% remaining in the books.
•Investment tax credit of 10%.
•Royalty of 7% on-shore, 5% off-shore tax deductible
Gas Exploitation (Upstream Operations)
Fiscal Arrangements are reviewed as follows:
•All investment necessary to separate oil from gas from the reserves into suitable products is considered part of the oil field development.
•Capital investment facilities to deliver Associated Gas in usable form at utilization or transfer points will be treated for fiscal purposes as part of the capital investment for oil development.
•Capital allowances, operating expenses and basis for assessment will be subjected to the provisions of the PPT Act and the revised Memorandum of Understanding (MOU).
Gas Utilisation (Downstream Operations)
Incentives given to investors for encouragement of exploitation and utilization of Associated Gas for commercial purposes include:
•Companies engaged in gas utilization are to be subjected to the provisions of the Companies Income Tax Act (CITA).
•An initial tax free period of five years.
•Accelerated Capital Allowance after the tax-free period in the form of 90% with 10% retention in the books for plant and machinery.
•15% investment capital allowance which shall not reduce the value of the asset.
In 1998, the government approved additional incentives to support the gas industry in the following areas:
•All fiscal incentives under the gas utilization downstream operations in 1997 are to be extended to industrial projects that use gas i.e. power plants, gas to liquids plants, fertilizer plants and gas distribution/transmission plants.
•Gas is transferred at 0% PPT and 0% Royalty.
•Interest on loans for gas projects is to be tax deductible provided that prior approval was obtained from the Federal Ministry of Finance before taking the loan.
•All dividends distributed during the tax holiday shall not be taxed.
Power Sector
The Federal Government of Nigeria has set-up several incentives to attract foreign direct investment into the power sector. The incentives include:
•Tax Holidays of up to 5 years
•Exemption from Duty Taxes on imported equipment
•Capital & Investment Allowance which can be carried forward and used after tax holiday period
•Manufacture of transformers, meters, control panels, switchgears, cables and other electrical related equipment are considered as pioneer products/industries. As a result, there is tax holiday of 5 to 7 years for investors who invest in these areas.
•Power plants using gas are assessed under the companies income tax act at a reduced rate of 30%
•100% foreign ownership of Electricity plants
•Repatriation of profit with a 5% withholding tax
•Instituting a politically independent, and transparent regulatory agent for the power sector that will effectively enforce the established regulatory framework
•Putting in place the necessary foundations e.g. reliable transmission infrastructure that would create a level playing field for efficient private sector participation in the electricity supply
•Implementing a transparent and predicated tariff adjustment mechanism that will cover cost of production and provide adequate returns on investment at all times.
Agriculture sector
Agriculture is one of the most viable sectors of the Nigerian economy. It
-accounts for over 70% of its employment;
-has an annual average contribution of about 35% to the GDP over the last 5 years;
-is highly diversified agro-ecological condition that supports the production of a wide range of agricultural products.
There is need for a policy shift towards encouraging commercial farming as it is dominated by traditional farming methods.
•Rice
–Imports over 2 Million MT/yr of milled rice
–Rice grows all across Nigeria
–Investment required in milling capacity for quality rice
•Cocoa
–Fourth-largest producer of coca beans in the world
–Produces between 300,000-350,000 tonnes of cocoa annually
–Exports about 96% of its cocoa crop
•Cassava
–The world’s largest producer of cassava; 45 million tonnes yearly
–Nigeria hopes to utilise cassava as part of its strategy to diversify its economy away from petroleum.
•Sugar
- Machinery and Spare Parts for the establishment of Local sugar
manufacturing industries shall attract 0%
- Sugar Cane to sugar value chain investors shall enjoy a 5yrs tax
holiday
- Raw sugar shall attract an import duty rate of 10% plus a levy of
50% while refined sugar shall attract an import duty rate of 20%
plus a levy of 60%
Telecommunications Sector
•Good tariff structure, which ensures that investors recover their investment over a reasonable period of time.
•Import duty on all telecoms equipment reduced from 25% to 5%.
•Measures on speedy clearance of goods at the ports