The unification of the foreign exchange rates and removal of fuel subsidy have worsened the operating environment and consumer market for Nigerian businesses. In this piece, TEMITAYO JAIYEOLA explores how businesses are trying to adjust to the new reality
On May 29, 2023, the Nigerian economy was thrown into a tsunami by its new president, Bola Tinubu. What began as a simple “subsidy is gone” quickly rippled through the country’s economic fabric. Petroleum, which had been sold for less than N200 per litre in most states before the statement, jumped to over N400 at the close of business.
By May 31, petrol had surged to over N600 per litre. The prices of almost everything in the market responded accordingly by doubling. Since petrol plays a crucial role in powering mobility, logistics, commerce, and other significant segments of the Nigerian economy, its price ultimately contributes significantly to the cost of goods and services.
This has led to a cost-of-living crisis in the country, adversely affecting the poor and economically insecure.
The World Bank recently disclosed that 7.1 million Nigerians were at risk of poverty because of subsidy removal.
“The poor and economically insecure households will face an equivalent income loss of N5,700 per month, and without compensation, an additional 7.1 million people will be pushed into poverty,” the Washington-based bank disclosed in its June 2023 edition of the Nigeria Development Update.
Since the removal of the petrol subsidy, inflation has jumped to an 18-year-high, leaping from 22.41 per cent at the end of May to 27.33 per cent as of October.
However, subsidy removal cannot be solely blamed for the worsening cost of living in the country. On June 14, 2023, the Central Bank of Nigeria directed Deposit Money Banks to remove the rate cap on the naira at the official Investors and Exporters’ Window of the foreign exchange market to allow for a free national currency float against global currencies.
The naira, which had closed trading at N471/$ on the I&E window the day before, depreciated to N664.04/$ at the close of trading that day. This was an instant 40.97 per cent decline in the value of the naira. And since Nigeria is import-dependent, inflationary pressures quickened.
The national currency has since solidified its position as one of the worst-performing currencies in Africa (losing 40 per cent of its value since June).
The Federal Government explained in its 2024-2026 Medium-Term Expenditure Framework and Fiscal Strategy Paper, when it said, “The lingering insecurity in major food-producing areas; high cost of transportation driven by rising energy costs occasioned by petrol subsidy removal; activities of middlemen in the food distribution channels; as well as the persistence of shocks from legacy infrastructural bottlenecks, remain significant drivers of the inflationary pressure.
“The unification of the Foreign Exchange market segments continues to weigh on consumer prices.”
The combination of these policies is now expected to slow economic growth and push inflation to 30 per cent, a more than two-decade high. The IMF recently disclosed that GDP growth was expected to slow to 2.9 per cent by the end of the year.
Perhaps the worst victims of those new policies, which are expected to improve the economy in the medium and long term, are businesses. Since the policies kicked in, the spike in raw materials and production costs has led to higher prices and more.
By the end of the year’s first half, manufacturers partly blamed fuel subsidy removal for increased job losses, unsold goods on supermarket shelves, and more. They revealed that 3,567 jobs were lost in the sector, and the amount of unsold goods in the market rose to N271.9bn.
The Manufacturer Association of Nigeria said, “This increase in inventory can be attributed to a weakened purchasing power of the consumers, brought about by diminishing real household income resulting from the ongoing escalation of inflationary pressures, compounded by the scarcity of naira in the first quarter of the year and the aftermath of the subsidy removal.”
The association also lamented that the policies were negatively impacting members. It said, “As a result, businesses and foreign investors are increasingly wary of committing capital, thereby, hindering economic growth and prospects for recovery.
“The combined effect of these is the resultant higher inflationary pressure, which fuels the cost of production, reducing consumers’ purchasing power and having a greater impact on the manufacturers.”
Eight manufacturers declared N495.36bn in FX losses by June’s end. Nestle Nigeria declared a loss of N123.77bn, Dangote Cement N113.63bn, Nigerian Breweries N70.6bn, Guinness Nigeria N49bn, International Breweries N40.67bn, Dangote Sugar N83.1bn, Unilever Nigeria N14.36bn, and Neimeth’s N22.82m.
As of August 2023, business confidence had waned in the country, and rising input costs led to a contraction in the manufacturing and services sector of the economy, according to the World Bank. Not able to take it anymore, many businesses across various sectors had announced price hikes.
Seven-Up Bottling Company Ltd, as of September 13, increased the factory prices of its products. A pack of twelve 50cl 7UP drinks rose from N2,250 to N2,400, and its Chief Malt 30cl drink pack rose from N1,850 to N2,250. Its price adjustment was across the board.
Google announced new subscription fees for Google One (100 GB) from N3,900/year to N9,500/year and it took effect from November 7.
In August, Nigerian Breweries Plc. raised prices for its products across the board. Heineken Bottle (60cl) was increased from N6,390 to N7,010; Gulder Bottle (45cl) rose from N6,020 to N6,700, 33; Export Bottle (60cl) rose from N4,700 to N5,080.
Also, Multichoice Nigeria implemented price increases (its second for the year) across its DStv and GOtv packages due to losses from the naira’s devaluation. In its third-quarter report, the firm recently reported its third consecutive semi-annual loss, blaming foreign exchange difficulties in Nigeria and persistent power outages in South Africa.
It said, “After adding 1.4 million new subscribers in FY23, subscriber growth in the rest of Africa was more subdued in 1H FY24. This was due to the impact of inflationary pressures in key markets like Nigeria, and similar trends to previous periods which followed a FIFA World Cup or Northern Hemisphere football off-season.”
It added, “Weaker currencies remained a significant impediment to improvements in profitability, with average first-half exchanges falling sharply against the USD.
“The sharp fall of the naira resulted in a large proportion of the previously recognised losses incurred on cash remittances now being recorded in trading profit. The net effect of these forex movements was a negative ZAR1.6bn impact on the segment’s trading profit for the period.”
The premium price for DSTV is now N29,500 from N24,500, Compact Plus is N19,800 from N16,600 and more. GOTV’s supa plus has increased from N10,500 to N12,500, Max from N4,850 to N5,700, and more. While those were just some price increases in the economy, generally, prices of goods and services have ballooned by more than 50 per cent in recent months.
Based on various reports, StarTimes, another PayTV, implemented price increases from September 1, 2023. Like others before it, the firm blamed the increase on challenging economic conditions, depreciation of the naira, and rising inflation.
It increased its Nova plan from N900 to N1,500, basic from N1,700 to N2,600, classic from N2,500 to N3,800, and more. That, however, has created a new problem for businesses as weaker consumer spending has led to lower sales volume, forcing many to consider closing shop.
The Director-General of Nigeria Employers Consultative Association, Mr Wale Oyerinde, simplified in a recent interview with The PUNCH, “It is no gainsaying that the operating environment for many businesses has not been favourable, made worse by the ongoing challenges.”
On his part, the Chairman of the Nigerian Association of Small and Medium Enterprises, South-West, Dr Solomon Aderoju, declared, “When the SMEs produce, they won’t be able to sell because the purchasing power is eroding and people are not buying.
“Some of us import our raw materials from other countries, which means the cost of raw materials will also be mounting. These problems will kill SMEs.”
A finance expert at the Pan-Atlantic University, Lagos, Associate Professor Olusegun Vincent, expanded, “When the exchange rate is floated in a country like ours, we are bound to face the consequences. The consequences of such will permeate both the government and the corporate bodies. Everybody will suffer from it.
“At the corporate level, many companies are bound to experience loss because there is that exposure when you have some of your debt denominated in foreign currency. Many of our companies have loans and commitments in their books denominated in dollars. The fair value of such transactions has increased by accounting standards and accounting practices. That is the provision of accounting.”
A Nigeria Economic Summit Group facilitator, Dr Ikenna Nwaosu, expected more companies to shut down because of the policies.
In a recent report by The PUNCH, he noted, “It will lead to some companies shutting down. First, if the cost of production and the cost of their raw materials exceed a particular stage and they can’t sell their final products because the market doesn’t accept a certain price, they will lose.
“So, many people are going to stop production, and that means there would be unemployment, maybe temporary unemployment. They could close down for some time, so there would be a snowball effect.
“It will lead to companies closing since the Federal Government has closed all special windows for foreign exchange. Finally, it will impact the educational sector, because, for students who are going overseas, there is no special window for them. They used to buy at a special window, but now they are buying at the open market.”
Businesses of all sizes, in the country, are now faced with a macroeconomic giant waiting to crush them. This has reduced investments, and business entry into the country since there is no clear path to sales or profit. While in the long-term, subsidy removal and the naira’s unification are expected to benefit the country’s economy, the worry on a lot of businesses’ minds is whether they would still be alive when this happens.
