International Institute of Business & Tax Excellence Newsletter (IIBTE.com)
Edition 3 - April 2020
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In this edition:
Sources of Instability and Inhibition of Business Growth in Nigeria
by Saijal Singh of Cayman International Asset Managers (Pty) Ltd
www.caymanassetmanagers.comCOVID-19 Accounting Considerations
by Azhar Mia of Kreston KZN
www.krestonsa.com/kznCOVID-19 Grips and World Economies Shudder
by Ridwaan Asmal of Coral International Asset Managers (Pty) Ltd
www.coralassetmanagers.comCOVID-19 – The Life Reset
by Nazneen Adam of Coral International Asset Managers (Pty) Ltd
www.coralassetmanagers.comArticle 1:
Sources of Instability and Inhibition of Business Growth in Nigeria
A. INTRODUCTION
Globalization and increased global integration have caused instability and conflict to expand beyond the domains of interstate wars.
Conflict and instability now have a dramatic effect on the economic development of a region which may then take years to recover from instances of civil war, terrorism, political and social instability.
Using Nigeria as a case study, we will further discuss their insecurity situation and its implications for business, foreign direct investment, operations and sustainable development.
B. NIGERIA: INSTABILITY AND ASSOCIATED CHALLENGES
1. AN ATTRACTIVE INVESTMENT HUB
According to Santos (2016), Nigeria has, since 2007, attracted the most foreign direct investment in Sub-Sahara Africa due to its well-developed legal and banking systems. Santos (2016) further elaborated that Nigeria is the largest economy in Africa and plays a central role in shaping the continent’s political agenda and trade.
Domestic instability is however leading to an increasing number of displaced Nigerians abroad, decreasing oil prices and a slowed economy. This statement is backed by figures from the 2010 Central Bank of Nigeria (CBN) Yearly Report which demonstrate a precarious 78.1 per cent decrease in outside direct investment. Ujah and Eboh (2006) further reported a study by World Bank on investment climate in nine African countries in which it was found that 29% of business operators in Africa and 36% in Nigeria perceived insecurity as a major constraint on investment. This situation has the damaging consequence of giving signal to the international community that Nigeria is not a safe and secure place and as such not suitable for investment and business activities.
We will further unpack the sources of instability and their impact on businesses who choose to invest in Nigeria.
2. SOURCE OF INSTABILITY: TERRORISM
Terrorism is the most fundamental source of insecurity in Nigeria today, generally linked to religious fanaticism and intolerance particularly in the conservative northern dominated states of Nigeria. Terrorism as defined by Onuoha (2011), is “the premeditated use or threat of use of violence by an individual or group to cause fear, destruction or death, especially against unarmed targets, property or infrastructure in a state, intended to compel those in authority to respond to the demands and expectations of the individual or group behind such violent acts.”
According to Jelilov, Ozden & Briggs (2018), Nigeria’s terrorism index show that terrorist activities have a significant effect on the growth of the economy.
Santos (2016) believes that economically empowering youth is a key piece in this puzzle, as the private sector needs a workforce, and youth need employment opportunities as an alternative to joining insurgent groups.
According to the 2015 Global Terrorism Index, from 2014-2015 Nigeria recorded the largest increase in terrorist activity in the history of the world, with a 300 percent increase in fatalities. Thus, in addition to increasing security threats from Boko Haram, Nigeria is facing its worst economic crisis to date, with the economy expected to shrink by 1.8 percent this year. The rise in violence scares investors who fear that instability could jeopardize profit and infrastructure.
Achumba and Ighomereho (2013) stated that businesses would decline to invest as such environments or economies are considered high risk zones due to the high level of uncertainty about the safety of investment and lives of the managers and their staff. Terrorism is on the rise and presents the potential risk of damage to business property, personnel and infrastructure hence inhibiting new business ventures and existing business growth.
3. SOURCE OF INSTABILITY: LACK OF INSTITUTIONAL CAPABILITIES LEADING TO GOVERNMENTAL
FAILURE
Fukuyama (2004) described this as a result of the corrosion of institutional infrastructures. The foundations of institutional framework in Nigeria are unstable and have provoked deterioration of state governance and democratic accountability, thus, paralyzing the existing set of constraints including the formal and legitimate rules nested in the hierarchy of social order.
As stated by Igbuzor (2011) the state of insecurity in Nigeria is a function of government failure or linked to government failure. This is manifested by the incapacity of government to deliver public services and to provide for basic needs of the masses. The lack of necessities by the people in Nigeria has created a pool of frustrated people who are ignited easily to be violent.
Hazen and Horner (2007) described the Nigerian situation as a ‘Paradox of Plenty’, where the country earns a great deal of revenue through oil sales but fails to utilize these earnings to meet the needs of its people, develop infrastructure and the economy. The risk this poses to businesses is that citizens look to businesses to provide the necessities that the government fails to provide through corporate social responsibility programs. While existing corporate businesses may be obligated to partner with citizens and the government to curb the shortcomings of the state, this will have short- and long-term ramifications on their operating profit and bottom line, thereby inhibiting business growth and expansion. As we already uncovered, there is a decline in foreign direct investment which is largely attributed to the state of insecurity in the country hence inhibiting new businesses from coming into Nigeria.
Nigerian governmental failure, socio-economic difficulties and the increase in crime is well documented globally, hence demotivating potential new business interests.
C. CONCLUSION
Nigeria holds one of the fastest growing economies and populations in the world but increasing instability and conflict has led to demotivation of potential investors, businesses and individuals. This has been purely due to the instability factors posing as business inhibitors. It is however important for all stakeholders, including the private sector, to support Nigerian stability and growth. As a way forward Nigeria needs a developmental approach to target the root of their instability and strengthen the business environment for foreign investors.
D. BIBLIOGRAPHY
Achumba and Ighomereho (2013). Security Challenges in Nigeria and the Implications for Business
Activities and Sustainable Development. Department of Economics and Business Studies.
Adedeji, D. and Eziyi, O. I. (2010). Urban Environmental Problems in Nigeria: Implications for
Sustainable Development, Journal of Sustainable Development in Africa, Volume 12, No.1, 124-145.
Fukuyama, F. (2004). State-Building: Governance and World Order in the 21st Century, Ithaca: Cornell University Press.
Hazen, J.M. and Horner, J (2007). Small Arms, Armed Violence, and Insecurity in Nigeria: The Niger Delta in Perspective, Switzerland: Small Arms Survey
Igbuzor, O. (2011). Peace and Security Education: A Critical Factor for Sustainable Peace and National Development, International Journal of Peace and Development Studies Vol. 2(1), 1-7, January.
Jelilov G., Ozden K., Briggs S. O. Journal of Management, Economics, and Industrial Organization, Vol.2 No.3, 2018, pp.41-61.
Onouha, F.C. (2011). Nigeria’s Vulnerability to Terrorism: The Imperative of a Counter Religious Extremism and Terrorism (CONREST)Strategy, Peace and Conflict Monitor, (2 February 2011), Retrieved from: http://www.monitor.upeace.org/innerpg.cfm?id [Accessed 24 Sept 2019].
Santos (2016). Youth at Risk: How can the Private Sector help Nigeria Fight Boko Haram. [online] Prosper. Available at: https://csisprosper.com/2016/08/17/youth-at-risk-how-can-the-privatesector- help-nigeria-fight-boko-haram/ [Accessed 24 Sept 2019].
Ujah, O. and Eboh, E. (2006). The Security Factor in Business Environment Across Nigerian States, African Institute for Applied Economics, Becans Working Paper 1.
Article 2:
COVID-19 Accounting Considerations
The COVID-19 pandemic has spread rapidly since the beginning of the year. Many major cities across the world are under various forms of lockdowns in an effort to “flatten the curve”. Barring those entities that qualify as essential services, most other entities have suffered a significant drop in demand and in some cases have had to cease operations completely. Despite various funding programmes being offered by the Governments, businesses have still been left in limbo as to what comes next for their business operations and how to best plan for the immediate future.
This article therefore addresses the accounting impact of the COVID 19 pandemic on the entity’s financial reporting in two broad categories as follows:
Going concern; and
Events after reporting period.
The sudden impact of the COVID-19 pandemic on most businesses raises concerns in relation to business continuity. Therefore, entities should carefully consider their circumstances and risk exposures when analysing how recent events may affect their financial statements. Specifically, financial statement disclosures will require to convey the material effects of the COVID-19 pandemic.
Going concern
COVID-19 is disrupting operations of many organisations, businesses and industries. Entities will be required to consider whether the disruption will be prolonged and result in liquidity shortfalls or diminished demand for products and services (or both). These factors, among other things, cause management to assess whether the entity may be able to continue as a going concern for at least, but not limited to, 12 months from the reporting date.
Financial statements are prepared on a going concern basis unless management intends either to liquidate the entity or to cease trading, or has no realistic alternative but to do so (IAS 1 para 25).
In the current situation, the assessment is made difficult given the uncertainties of the impact of the COVID-19 pandemic, the extent and duration of lockdowns and social distancing measures in effect in many jurisdictions and the impact on the economy. Management should consider the impact of these matters on the entity’s unique circumstances, with particular focus on current and potential cash resources including access to existing and new financing facilities. Access and use of such facilities and arrangements should be disclosed in the financial statements.
The assessment as to whether the going concern basis is appropriate takes into account events after the end of the reporting period (this is addressed below). For example entities reporting on years ended 31 December 2019 or even as late as 29 February 2020 may not have been impacted by COVID-19 at the end of the reporting period. However, where they have been severely affected by COVID-19 subsequently, management will need to consider the appropriateness of preparing financial statements on a going concern basis even though the significant impact on operations occurred after year-end.
In making this assessment, management will need to consider all information available up to the date of authorisation of the financial statements (in certain jurisdictions, local regulations may extend this period). The disclosure should be unique to the entity’s situation, for example explaining how and when the uncertainty may affect its operations and its impact on the entity’s financial performance, financial position, liquidity, solvency, operations and resources.
Events after reporting period (IAS 10)
Given the economic environment and the likelihood that events may suddenly and unexpectedly occur, entities should carefully evaluate information that becomes available after the end of the reporting period but before the date of authorisation of the financial statements. The amounts in the financial statements must be adjusted to reflect events after the end of the reporting period that provide evidence of conditions that existed at the end of the reporting period. Events that are indicative of conditions that arose after the reporting period are non-adjusting events (IAS10, para 3(b)). They are not reflected in the recognition or measurement of items in the financial statements, but require disclosure when material (IAS10, para 10).
The full impact of the COVID-19 pandemic on short-term, medium-term, and long-term economic activity is still unknown, and major developments are occurring frequently. Whilst the events arising from COVID-19 are volatile, entities will nevertheless be required to consider these conditions as they existed at the reporting date when evaluating subsequent events.
With respect to reporting periods ending on or before 31 December 2019, it is generally appropriate to consider that the effects on an entity are the result of events that arose after the reporting date that may require disclosure in the financial statements but would not affect the amounts recognised.
For subsequent reporting dates, entities will need to assess how much of the impact of COVID‑19 should be considered to arise from non‑adjusting events. This will be highly dependent on the reporting date, the jurisdiction in which the entity operates, the unique circumstances of the entity’s operations and the particular events under consideration.
If non‑adjusting events are material, an entity is required to disclose the nature of the event and an estimate of its financial effect (IAS 10, para 10). The estimate does not need to be a perfectly accurate number. It is preferable to provide a range of estimations as an indication of impact to not providing any quantitative information at all. However, where quantitative effect cannot be reasonably estimated, qualitative description should be provided, along with a statement that it is not possible to estimate the effect.
BIBLIOGRAPHY
A guide through IFRS Standards – July 2016
Article 3:
COVID-19 Grips and World Economies Shudder
COVID-19 is an infectious disease that affects the respiratory system which is caused by a specific virus (SARS-CoV-2) and labeled in the press as “coronavirus.”
The disease was first identified in December 2019 in Wuhan, the capital of China's Hubei province, and has since spread globally, resulting in the ongoing coronavirus pandemic. In the wake of the gripping Covid-19 pandemic, even China who has been the highest contributor to global economic growth for more than a decade have not been spared.
China is the second-largest economy in terms of nominal gross domestic product (GDP) of $14.14 trillion. Given its huge base of manufacturing exports, China has often been dubbed as the “world’s factory.”
Various monetary and fiscal measures were announced by the Chinese authorities to support the economy and its people in the time of this pandemic crisis. However, the short-term damage is evident:
Total retail sales of social consumer goods were down 20.5% in the first two months of 2020 as compared to the same period in 2019;
Investment in manufacturing and real estate development declined by 31.5%, and 16.3%, respectively;
The value of exports was down by nearly 16%.
A contraction of its economy in the first quarter of 2020 may be massive and the magnitude of this loss and time to get back to normal are only calculated guesses at this stage. Having said that, most estimates suggest the intactness of China’s long-term growth.
Just a glimpse of the impact of this pandemic on the United States of America (USA) sees them entering into a bear market on its stock exchange.
A bear market is defined as a drop of 20% or more from a prior closing high.
The S&P 500, Dow Jones Industrial Average and Nasdaq have all closed 20% below the all-time highs they reached in February to end their bull-market runs. Thus, making it the worst drop since the 2008 global financial crises (see below).The uncertainty surrounding COVID-19, has left investors shuddering on what will unfold during the coming days and weeks, including the likelihood of a US or global meltdown.
Recession and financial crises
Although the spread of the virus in China slows, countries in Europe and the United States are seeing an unprecedented spike in infections. At the time of writing this article, over a million people around the world have already been infected by the coronavirus. Globally, the overall impact of COVID-19 would shudder economic activity enough to slow global growth substantially, particularly in the manufacturing and tourism sectors.
To add further fuel to fire, global oil benchmark Brent crude plunged to its lowest level in almost 18 years at the end of March (2020).
US crude tumbled below $20 a barrel as investors faced the growing prospect that the global coronavirus shutdown could last for months, further squeezing demand for fuel.
The pandemic is expected to cause at least a 20% drop in fuel demand worldwide as governments take steps to restrict the spread of the infection. Due to a price war erupting between Saudi Arabia and Russia earlier in March after the collapse of a three-year deal to limit supply between the Organization of the Petroleum Exporting Countries (OPEC) and Russian oil producers, oil is set to flood the market in the coming months.
The sharp fall-off in the oil price, combined with the continued spread of the virus internationally and the systematic downward revisions to global growth estimates, has started to more significantly undermine emerging markets, including foreign capital flows. Consequently, during the past couple of days the South African Rand has weakened to a record low of R18 to the dollar.
Delayed shipments and production schedules could create financial woes for companies with heavy debts, especially in the US, coupled with a decline in global equity markets. The end result (God forbid) being:
Global GDP stagnating + International trade falling = World Recession
Hope/Recovery
Let’s hope the second half of 2020 foresees a “recovery.” As China slowly returns to normal, their resilient economy should see an increase in both the supply and demand for goods, which ultimately will have a positive spin-off effect throughout the world.
Looking ahead we have to be optimistic – lockdowns, gloves, masks and sanitizers off, on with remote working, virtual classrooms, automation and digitization, health and wellness, online shopping, renewable energy and most importantly valuing family and your loved ones!
References
Bachman, D. (2020). The economic impact of COVID-19-Deloitte Insights. [online] Available at: https://www2.deloitte.com/us/en/insights/economy/covid-19/economic-impact-covid-19.html [Accessed 01 April 2020].
Bajpai, P. (2020). An Overview of China's Economy and How Coronavirus Affected It. [online] Available at: https://www.nasdaq.com/articles/an-overview-of-chinas-economy-and-how-coronavirus-affected-it [Accessed 31 March 2020].
Fries, T. (2020). How does the COVID-19 stock market crash compare to past epidemics (The Tokenist) [online] Available at: https://thetokenist.io/how-does-the-covid-19-stock-market-crash-compare-to-past-epidemics/ [Accessed 01 April 2020].
Lings, K. (2020). COVID-19: its impact on economies and financial markets. [online] Available at: To3. https://www.stanlib.com/2020/03/09/economic-and-financial-market-impact-of-covid-19/ [Accessed 01 April 2020].
Article 4:
COVID-19 – The Life Reset
Most of the world is in a lockdown.
Our businesses wade in unchartered territory, its course forever changed by a virus that has proven to move faster than we can react. The word on everyone’s lips to describe this situation is “unprecedented”. There isn’t a blueprint, a roadmap, a previous situation we can refer to for guidance and I wonder if there are any organisations that consider themselves prepared for this (or any other) pandemic on such a scale.
Along with the impact on businesses, our very freedoms have now been compromised. We live behind our closed doors, eagerly waiting for this invisible terrorist to wreak its havoc and leave us but as each country battles this at a different stage of its lifecycle, the lifetime of this disease is uncertain. There are various mitigating factors of which the majority are country specific – so attempts at predictions are just that – attempts.
With John Hopkins reporting the number of global confirmed cases surpassing one million (figures as at 03rd April 2020) , and the death toll rising – there are some world leaders who hold a false sense of immortality and immunity against this disease, whilst others are implementing strict measures to safeguard their people. There are difficult decisions to be made though. Third-world countries already carry the burden of shrinking economies, increased unemployment and poverty, healthcare systems which are overburdened and understaffed and an uneducated population.
It is easy to allow the numbers to invade our mindsets, when the videos being shared are of the dire situation in countries such as Italy but this pandemic is an opportunity to evaluate our lives and that which we are accustomed to. For many, the freedom of movement is taken for granted and yet this is integral to our social well-being, our income stream, charitable work and (for some) fulfilling religious obligations. The old adage of “you don’t know what you have until it’s gone” is apt for much of the global population today.
The day will arrive when the world will emerge from the clutches of this deadly virus, and we will look at the destruction left in its path and despite the despair and sadness, we will also be grateful to be alive. The second chance we will be given to experience all the previously seemingly insignificant things will be appreciated more than we would have anticipated.
FaceTime and Skype has had a part to play in keeping us connected but the happiness that radiates through ones being when the person you love envelopes you in a warm embrace, or the feeling of the sand beneath your feet as you watch the sun set over the horizon and the laughter you share over a family meal are moments that cannot be replicated successfully on these or any other platforms. It requires real human interaction – with each other and with the environment. We look forward to being in the crowd celebrating the union between two people on their wedding day, visiting new parents to rejoice in the birth of a new life and gathering with our families and friends like we used to do before this virus swept through the globe.
Covid-19 can be likened to a hard reset on life. There will be many who will not make it out of this pandemic alive and it will cause an unimaginable sadness to descend on their loved one’s hearts. There will not be words to ease their grief at this invisible enemy’s effect on those families, but for many of us who make it through, it will be a time of introspection.
There is a light at the end of the tunnel but we need everyone to come together in a show of solidarity. This is not just about world leaders taking the reins, but about us fulfilling our responsibility to humanity to save lives.
Even if this means, simply staying home.
Bibliography
Statistics were extracted from John Hopkins University and Medicine Website: https://coronavirus.jhu.edu/map.html (Accessed 03rd April 2020)
End.