Summary: West Africa has long been touted as one of the best destinations for doing business, partly due to its natural resource endowment and large and growing population. However, the region has faced many economic challenges in recent years, which have been exacerbated by the COVID-19 pandemic as well as the Russian-Ukraine war. The recent economic woes of some countries in the region have led to mass exits of foreign companies, potentially triggering a region-wide problem. This brief article explains the ongoing corporate exodus in West Africa’s two largest economies- Ghana and Nigeria and goes further to analyse and proffer some short-to-long term solutions.
The West African (WA) sub-region has long been the destination of choice for most foreign investors. The region’s vast array of untapped natural resources, youthful population and relatively stable political environment puts it on the wish list of many multinational companies (MNCs). A decade ago, when the region recorded a growth rate of 6.7%, optimism grew as investor expectations drove in more Foreign Direct Investments (FDI). Alas, the region’s positive economic outlook was tainted as commodity prices took a hit, with crude oil prices reaching a record low of $40 per barrel. Even though the COVID-19 pandemic and the Russia-Ukraine war exacerbated economic woes, FDI still percolated into the region as investors remained optimistic. However, a recent exodus of foreign investors in the region has raised many agitations and heightened fears over the future economic prospects of the sub-region. This piece delves into how two of WA’s biggest economies- Nigeria and Ghana could trigger a region-wide exodus of foreign investors outside their usual ‘Jollof and afrobeat’ wars.
GlaxoSmithKline Consumer Nigeria Plc, Bayer AC, Sanofi SA and Procter & Gamble Co Ltd. are big brands in Nigeria that have delivered some of the essential household products (Pampers, Ariel, Oral B, etc.) consumed by Africa’s most populous nation. Each of these companies had positive expectations upon entering Africa’s second-largest economy. Sadly, today, these companies are on the verge of bidding farewell to the same economy that welcomed them with unfeigned optimism. The aforementioned names are recent additions to a growing list of large multinational companies that have either checked out of the Nigerian economy or have proposed to do so. Aside from these companies who have decided to close shop and ‘jappa’ (move away), others like Unilever and Nestle have had to cut back on parts of their operations or product lines due to the high cost of production. Earlier this year, personal care product brand PZ Cussons reported a significant downward revision of its profit projections, while Cadbury Nigeria Plc announced a credit swap of loans taken from its parent company to equity due to an inadequate supply of foreign exchange for debt servicing. These are just a few noteworthy exits in the past 24 months, with many other high-profile exits occurring years prior. In addition to these, Woolworth Holdings, Tiger Brands and Truworths Limited in the fashion sector and South African grocery giant, Shoprite Limited also exited the Nigerian economy after 16 years of operation.
Some 1700 kilometres away from Nigeria, their sister country and closest anglophone mate, Ghana, faces a similar plague. The WA country, formerly known as the Gold Coast and recently touted as the fastest-growing economy in Africa with a GDP growth rate of 8.1% in 2017, has also had its fair share of corporate exits. Jumia Foods, Dark and Lovely, Nivea, Game (supermarket) and BiC (pen) are among the big names that have waved goodbye to Ghana recently. Like the strategy they adopted in Nigeria, Unilever has also closed down its production operation of Lipton Tea in Ghana, citing the high cost of operation as the main reason. Glovo, a popular delivery service provider offering several job opportunities for young people across the country, announced its decision to close shop two weeks ago. Also, Societe Generale (SG), one of the leading commercial banks with several decades of experience in the Ghanaian banking space, are rumoured to be advanced in its plans to exit the Ghanaian market as part of a broader strategy to shift its operations from the African market.
Ramifications resulting from these corporate exits have been grave, and experts suggest this may be a precursor to more turbulent times ahead. Particularly, the exacerbation of unemployment does not only pose an economic threat but holds security concerns for the entire WA sub-region. The rapid population rise (outpacing economic growth) in Nigeria, coupled with the sustained increase in unemployment, which was reported to have risen further to 6% in the first quarter of 2024, makes the corporate exodus in Nigeria more troubling. Ghana’s situation is more precarious considering its dreadful average unemployment rate of 14.7% reported for Q1, Q2 and Q3 of 2023 with female unemployment outpacing that of male unemployment. These figures are most certainly heading downward in light of the recent exits if no austerity measures are taken to boost employment in the short term.
In addition to concerns about unemployment, governments’ balance sheets are projected to take a hard hit with respect to tax and non-tax revenues paid by these departing multinationals. Ghana and Nigeria already have some of the lowest tax collection ratios in the world, with Nigeria recording a tax-to-GDP ratio of 9.4% in 2023 and Ghana recording a ratio of 12.4% in 2022. On the African scene, the two WA countries performed abysmally in the area of revenue mobilization. Ghana’s tax-to-GDP ratio 2021 (14.1%) was lower than the average of 33 African countries in 2023 (15.6%) by 1.4 percentage points. To keep these figures from debilitating further, these exits must be curtailed urgently to safeguard economic growth potentials and prevent investor confidence from further diminishing. While on this matter, it is important to note that taxation is a double-edged sword. Governments can use it to raise revenue or deter businesses from entering the market. The sad reality is that most businesses in WA are being choked by governments’ excessive taxes levied on them. In the past 7 years, the Ghanaian government has introduced or amended a minimum of 11 tax laws. These include the controversial Electronic Transactions Levy (E-Levy), the COVID-19 levy, the Financial Sector Clean-up Levy, the Energy Sector Clean levy, the Sanitation and Pollution Levy, the Growth and Sustainability Levy, The Excise Duty Amendment Act, the African Union Import Levy, and the Income Tax Amendment Bill among many others. Although the government counterargues that it has abolished some 17 ‘nuisance taxes’ upon assuming office, their net benefit on businesses remains negative.
Ultimately, the tax burden is passed on to consumers making prices of locally manufactured products less competitive relative to imported products. This is one of the main contributing factors to the corporate exodus in Ghana, as businesses have lost their demand for imported products, negatively impacting their profitability. Some other reasons most MNCs have given so far for their exits are currency depreciation, high cost of operation and lack of infrastructure. Contrary to popular belief, MNCs create the biggest demand for foreign exchange in WA, not local manufacturers or traders. MNCs demand foreign exchange for two main purposes: first, to import machines and/or raw materials for production, and second, to repatriate earnings to their home countries at the end of their respective business cycles. In Ghana, MNCs make up over 70% of the demand for forex. According to industry players, exchange rate depreciation is the most challenging factor inhibiting their operations. Fortunately, governments have also identified this as a major stumbling block since they are co-passengers on the drowning ship and bear the brunt of currency depreciation. Governments’ foreign reserves have been suffocating in an attempt to deal with the depreciation of their local currency and the depreciation rate. With Ghana currently on an IMF program, the Bank of Ghana’s hands are tied about how much they can influence the market owing to stringent restrictions imposed by the program. Notwithstanding, the government in January 2023 introduced what was popularly known as the Gold-for-oil (G4O) program. The main rationale behind this initiative was to purchase oil with gold instead of the usual USD to reduce the rate of depreciation of the Ghana cedi, which, per expert analysis, is largely driven by the oil and energy sector. The G4O program has failed to significantly and sustainably curtail the depreciation of the Ghana Cedi, triggering several calls for the policy to be set aside.
In Nigeria, President Bola Tinubu has vowed to resurrect the Nigerian economy and convince naysayers that his government can retrench the exodus of big-name multinationals through two key policies; fuel subsidy removal and floating exchange rates. According to a recent Bloomberg report, the free-fall of the Naira, coupled with pervasive inflation, has slashed the profits of global conglomerates, forcing some out of Africa’s second-biggest economy. Switching to a floating exchange rate regime has not yielded successful outcomes for the Nigerian economy, given the persistent depreciation of the Naira, even though a few stints of currency appreciation were recorded, albeit short-lived. For an oil-dependent, import-based, $253 billion economy like Nigeria, a floating exchange rate regime will always be problematic, especially in the short term, due to the erratic nature of oil prices as well as the activities of speculators. Therefore, unifying the exchange rate regime and allowing prices to be determined by market forces poses a lot of threats to the Nigerian economy given current volatilities in the global oil market.
In the case of Ghana, the G4O program even though implemented with the best of intentions, struggled to address the underlying problem partly due to its limited coverage of the oil demand in Ghana. Recent data by the Bulk Oil Storage and Transportation Company Limited (BOST) revealed that the G4O program covers approximately 40% of the fuel demand in Ghana. This leaves approximately 60% of the demand for oil unhedged and vulnerable to the volatilities and shocks in the global oil market. To this end, broadening the G4O program to cover a significant part of the 60% demand for oil made by the 33 private bulk-distributing companies (BDCs) in Ghana is important. This may be considered a short-to-medium-term policy. A long-term strategic plan could be to increase Ghana’s optimal reserve-to-GDP ratio by using the gold acquired to build gold reserves rather than exchange them for oil as is being practiced currently. This will help shore up the local currency as gold is well known to be the stabilizing force behind some of the major trading currencies. It is important to note that the determinants of the Cedi’s depreciation, although largely driven by oil prices, are not limited to that. Therefore, a holistic approach is imperative to address structural issues that directly or remotely contribute to the phenomenon. There is a need for a stringent national policy to control the high dependence on foreign products and address speculators’ activities. An agreement or moral suasion of MNCs regarding how they repatriate their earnings is long overdue to curb the seasonal pressures on forex. In the case of Nigeria, even though some of the macroeconomic growth strategies are yet to yield their intended results, a low-hanging fruit could be to stop the Central Bank of Nigeria (CBN) from pumping more Naira into the economy to reduce the pressure on the Naira which has already suffered a 35% hit in depreciation in 2024. Also, the worsening inflation and trade liberalization policies could spell doom for the economy, particularly now that some MNCs have changed their strategy from local production to importation.
Even though some have argued that these corporate exits may be a blessing in disguise for locally-owned businesses in both Ghana and Nigeria, it is important to heed to assertions that huge deficits in production and employment occasioned by these corporate exits cannot be augmented by local firms, at least not in the short-term. Even if effective strategies and policies are set in motion in the short to medium term, it will be irrational to assume that local manufacturers will somehow bridle through the same economic turbulence that drove out their foreign counterparts. Notwithstanding, boosting domestic production remains one of the surest solutions to curbing imports and shoring up the naira (and the cedi), ultimately reducing the pressure on forex and creating some breathing space for MNCs with regard to their cost of production.
Problems of inadequate electricity supply and lack of key infrastructure like road networks and affordable internet must be on top of the priority list of governments. Particularly for Ghana and Nigeria who have been battling issues of erratic power supply, such issues must be addressed as a matter of urgency as this drives up the cost of production and reduces the competitiveness of their products with negative aftermath on their profitability. While the government’s need to increase tax revenues to augment deficits created by the pandemic is understandable, such tax policies need to be implemented to make it facile for businesses to cope. More so, unnecessary, ‘nuisance’ taxes must be abolished or reviewed. Ultimately, Nigeria, Ghana and the entire West African sub-region need governments to manage their respective economies and invest in critical infrastructure to create an enabling environment for local and foreign businesses to thrive. Even though there is evidence of some strategic macroeconomic policies, it is important to ensure that policies like the G4O in Ghana as well as subsidy removal and floating exchange rate regime in Nigeria, tackle the fundamentals of their respective economies and address structural bottlenecks to make such policies transformational enough to stimulate economic growth and restore West Africa’s two largest economies as the best destinations for foreign investments in the region.
