Doing Business In Africa: Equatorial Guinea

Written by Jeffrey Cavanaugh

Equatorial Guinea, by any stretch of the imagination, is not an easy place to do business and investors should understand the risks.

We examine these in our ongoing AFKInsider series. This week, Doing Business in Africa: Equatorial Guinea.

Sandwiched between Cameroon and Gabon — and split between an island and the African mainland — this small country has been called the Kuwait of Africa.

Once a colony of Spain, Equatorial Guinea achieved independence in 1968 under the megalomaniacal leadership of Francisco Macías Nguema – the country’s first president. During his time in office the country was given the unfortunate subtitle of “Dachau of Africa” under a violent, cult-of-personality dictatorship that forced a third of its population to flee to neighboring countries.

Nguema condemned Marxism as a European import, but nonetheless allied himself with the Soviet Union and imposed an increasingly chaotic – some might say insane – reign of terror. Upon Africanizing his own name in 1976, for instance, he forced the country’s remaining population to do so as well upon pain of death. He also banned Western medicine, private education, use of the word “intellectual,” and ordered the execution of all members of the educated population who did not flee abroad.

To say that the country’s development stagnated during this period is something of an understatement. There were in fact no plans to develop the country. Even the simplest system of keeping track of government funds did not exist; nor was there any attempt at macroeconomic management. Nguema executed the head of the central bank and transported the remnants of the national treasury back to his home village. If anything, insanity and murder on a grand scale seemed the only policy Nguema seemed interested in pursuing.

In one surreal incident during Christmas of 1975, Nguema ordered soldiers to dress in Santa Claus costumes and execute regime opponents by shooting them in a football stadium while he watched and listened to the stadium’s PA system blasting out Mary Hopkin’s “Those Were the Days.” Near the end of his reign, Nguema did what Roman emperors did, declaring himself a deity and changing his country’s motto to, “There is no other God than Macias Nguema.”

Mercifully, Nguema was overthrown in a coup in 1979 and executed shortly thereafter. His replacement, Teodoro Obiang Nguema Mbasogo, remains president to this day and while his rule has not been marked by the same level of cruelty as his predecessor, it is also corrupt, thoroughly authoritarian, and increasingly, in the views of most human-rights observers, brutal.

Arbitrary arrests, indefinite detentions, widespread torture of regime opponents and lack of press freedom are the rule in Equatorial Guinea, not the exception. In a throwback to an earlier era, state radio declared in 2003 that Obiang was “the country’s god” who had “all power over men and things.” The Almighty, according to the declaration, had given the president leave to “kill without anyone calling him to account and without going to hell.”

While awful for the people of Equatorial Guinea, much of this wouldn’t much matter to the world economy except for the fact that in the 1990s, the country became a major producer and exporter of oil – including to the U.S. Accordingly, Western oil corporations have flocked to the country in an ongoing effort to develop the country’s estimated 1.1 billion barrels of recoverable crude.

What’s more, allegations of bribery have been consistently leveled against firms operating there, and not without merit. Reputedly worth $600 million, Obiang’s assets have been seized by French and American government officials in an ongoing corruption investigation. In other cases involving the now-defunct Riggs Bank of Washington D.C., Exxon Mobil and Amerada Hess allegedly deposited hundreds-of-millions of dollars into accounts controlled by Obiang and his family.

Ease of Doing Business

Given all this, what are business conditions like in Equatorial Guinea? According to the World Bank, Equatorial Guinea currently ranks 164th out of 183 countries on its Ease of Doing Business Index. The index was created by the bank to measure the degree to which commercial enterprises encounter regulatory hurdles, legal threats to property, and the time and money spent on things such as registering a business, ensuring right of title to property, and acquiring licenses. By way of comparison, the U.S. ranks 4th on ease of doing business, right after Singapore, Hong Kong, and New Zealand.

What does this ranking mean? Take, for instance, the bank’s measure of how easy it is to start a business, which is depicted in Figure 1 below. The bank defines business-creation costs as the time and money involved in the series of legal steps to establish an in-country firm. Using this framework, the bank tasks researchers to establish in-country averages.

Equatorial Guinea ranks 179th out of 183 countries for ease of starting a business, making it one of the hardest countries on Earth to start a legal commercial enterprise. An entrepreneur must complete 20 bureaucratic procedures that take a total of 136 days and cost almost $13,000. Additionally, Equatorial Guinea requires startups to have at least $2,645 in operating capital.

Figure 1:

How the World Bank Measures Ease of Starting a Business

       Fig 1 Ease of Business Graphic WB

Using similar metrics for other aspects of business operations, the bank ranked Equatorial Guinea in a number of other areas. For ease of obtaining a construction permit, Equatorial Guinea ranks 109th out of 183. It takes the completion of 18 procedures and an average of 201 days at a cost of $27,324 — more than twice the per capita income. It’s an improvement on the previous score, but still an obstacle to business creation and expansion in this country.

For ease of obtaining and registering property, Equatorial Guinea ranks 79th. To register property requires completion of six bureaucratic procedures that take, on average, 23 days and cost 6.3 percent of the property’s financial value in fees.

Equatorial Guinea does less well when it comes to obtaining credit, ranking 138th out of 183 – making it one of the more difficult places in the world to obtain credit. The bank examines the legal rights of creditors and borrowers in secured transactions and bankruptcy law as well as the strength of credit information bureaus and exchanges.

The more lenders have both strong legal rights and easy access to a wide variety of information about the client’s creditworthiness, reasons the bank, the more available credit will be. When information on borrowers is significantly lacking – as is the case in most of Africa – legal protections for creditors must in turn be very strong.

In Equatorial Guinea, creditors have weak legal rights and there is very little credit information available on the general population.

Figure 2:

How the World Banks Conceptualizes Credit Acquisition

Fig 2 Ease of Business Graphic WB

When it comes to protecting investors and minority shareholders, Equatorial Guinea continues to do poorly. Here, the country ranks 147th out of 183 countries – making it an unfavorable place for shareholders. Equatorial Guinea received this score because it has relatively weak disclosure requirements for corporate officials, little in the way of director liability laws, and is a relatively difficult place to bring shareholder lawsuits, World Bank reports.

Equatorial Guinea does even worse when it comes to paying taxes. World Bank estimates that pleasing the tax man in Equatorial Guinea requires a total of 46 payments over the course of a year that take up to 492 hours to complete and can consume up to 59.5 percent of a company’s profits. Accordingly, Equatorial Guinea’s tax burden is ranked 170th out of 183 – one of the worst in the world in this category.

When it comes to engaging in cross-border trade, Equatorial Guinea also receives a low score. To import goods into the country one must have seven documents for customs officials to inspect. On average, it takes a total of 48 days to import goods into Equatorial Guinea at a cost of $1,411 (excluding tariffs) per container.

The cost to export goods is nearly the same. Equatorial Guinea requires seven documents to be inspected by customs’ officials at a cost of $1,411 per container, with delivery taking up to 29 days from point of origin. Compared to global averages, this nets Equatorial Guinea a ranking of 137th out of 183 on ease of engaging in cross-border trade.

Equatorial Guinea does better when it comes to contract enforcement. It ranks 72nd out of 183 countries. On average, it takes 40 legal procedures to see a contract from dispute to resolution, involving 553 days spent in court or otherwise attending to legal issues. Pursing a contract claim typically costs 18.5-percent of the value of the claim.

Finally, in terms of closing or liquidating a business, Equatorial Guinea ranks 183rd out of 183 countries examined — there is no history of this practice in the country.

Table 1 presents a summary of these rankings as well as Equatorial Guinea’s overall ease-of-doing business rating. Equatorial Guinea does poorly in a number of areas, but does worst in the area of taxes and opening and closing businesses. Registering property and enforcing contracts are relatively easier, but only middling by world standards. Equatorial Guinea, by any stretch of the imagination, is not an easy place to do business and investors should understand the risks.

Table 1:

World Bank Ease of Doing Business

Assessment and Rankings: Equatorial Guinea

Equatorial Guinea ease of doing business Table

Prospects

Looking ahead, what can one say about the future prospects of Equatorial Guinea? True, it is rich, but that wealth is unevenly shared oil wealth. One look at the country’s volatile economic growth rate – which can explode one year before collapsing into deep recession the next – indicates of instability. Like its politics, the economy of Equatorial Guinea is sustained by the immense financial windfall created by the country’s oil production. There is no national economy in a real sense – just oil production and consumer spending by the country’s elites, many of whom deem such revenues part of their personal property.

Figure 3:

Equatorial Guinea Economic Growth,

Percent Increase, 2003 – 2013

Equatorial Guinea GDP Growth

Outside a tiny elite who live in guarded splendor, the rest of the country’s people live mostly in poverty. They do not participate in what passes for Equatorial Guinea’s economy.  little is spent on education, health, or economic needs. Three quarters of the population lives below the U.N. definition of poverty – $2 a day – even though the country has one of the highest per capita gross domestic products in Africa.

Equatorial Guinea’s oil production is said to be declining and without additional investment, production could fall from the current level of about 270,000 barrels a day. To combat this, the government has attempted to lure firms other than oil companies to Equatorial Guinea and has gone on an infrastructure investment binge by repairing roads, building airports, and creating new towns where none had stood before. Unfortunately, poor business conditions and the country’s poverty and corruption mean little of this spending is likely to work. What use is it to build superhighways, for instance, if the population is too poor to own cars?

This translates to ongoing political and economic crisis in Equatorial Guinea that does not look to be ending any time soon. Oil profits can keep the country afloat and the president and his family in power for so long.

Unless Equatorial Guinea’s elites engage in a serious campaign of reform to steer the country’s resources into projects that will actually help its people, what happens after the oil goes is anyone’s guess.

Jeffrey Cavanaugh holds a Ph.D. in political science with a specialization in international relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFK Insider, Mint Press News and BAM South.

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