Nigeria’s business climate and consumer market have worsened as a result of recent policy changes, such as the unification of currency rates and the elimination of fuel subsidies. TEMITAYO JAIYEOLA reports on the ways in which businesses are adjusting to the new normal. the IMPACT
On May 29, 2023, Nigeria’s new president, Bola Tinubu, unleashed a tsunami on the country’s economy. What began as a simple “subsidy is gone” quickly resonated through the country’s economic fabric. After the announcement, the price of a gallon of petrol, which had been less than N200 in most states, shot up to well over N400 by the end of the day.
On May 31st, the price of a gallon of petrol had risen to more than N600. As a result, the cost of nearly all goods on the market doubled. In Nigeria, the price of fuel has a major impact on the cost of living since it is used to power so many essential economic activities, including transportation, logistics, and trade.
The result is a national cost-of-living crisis, which has hit the poor and the unemployed particularly hard.
Subsidy withdrawal has put 7.1 million Nigerians at risk of poverty, according to a recent World Bank report.
According to the World Bank’s June 2023 Nigeria Development Update, “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.”
Inflation has reached an 18-year high since the fuel subsidy was eliminated, rising from 22.41 percent at the end of May to 27.33 percent in October.
The rising cost of living in the country is not, however, entirely attributable to the elimination of subsidies. In order to allow the naira to float freely against world currencies, the Central Bank of Nigeria ordered Deposit Money Banks to lift the rate cap on the naira at the official Investors and Exporters’ Window of the foreign exchange market on June 14, 2023.
The naira dropped from the previous day’s closing price of N471.00 to N664.04.00 on the I&E window. The value of the naira dropped instantly by 40.97%. The country’s reliance on imports also meant that inflationary pressures increased rapidly.
Since then, the national currency has lost 40% of its value, making it one of Africa’s worst-performing currencies.
“The lingering insecurity in major food-producing areas; high cost of transport driven by rising energy costs occasioned by petrol subsidy removal; activities of middlemen in the food distribution channels; and the persistence of shocks from legacy infrastructural bottlenecks, remain significant drivers of the inflationary pressure,” the government wrote in its 2024-2026 Medium-Term Expenditure Framework and Fiscal Strategy Paper.
Consumer prices are still being weighed down by the Foreign Exchange market’s consolidation, according to the report.
As a result of these initiatives, inflation is predicted to rise to 30%, which would be the highest level in over two decades. The IMF recently reported that GDP growth was likely to decelerate to 2.9 per cent by the end of the year.
Businesses may suffer the most from the new policies that aim to boost the economy in the medium and long run. Since the policies went into effect, prices have gone up along with the increase in the cost of raw materials and production.
The elimination of gasoline subsidies was partially blamed by manufacturers for rising job losses, unsold items on supermarket shelves, and other problems by the end of the first half of the year. They discovered that the sector lost 3,567 jobs, and that unsold inventory increased to N271.9bn.
“This increase in inventory can be attributed to a weakened purchasing power of the consumers,” the Manufacturers 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 group expressed disappointment that its members were suffering as a result of the rules. According to the report, this has made firms and international investors apprehensive of making financial commitments, which has dampened economic growth and dampened hopes for a rebound.
“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.”
By the end of June, eight factories had reported FX losses totaling N495.36bn. Losses of N123.77 billion were reported by Nestle Nigeria, N113.63 billion by Dangote Cement, N70.6 billion by Nigerian Breweries, N49 billion by Guinness Nigeria, N40.67 billion by International Breweries, N83.1 billion by Dangote Sugar, N14.36 billion by Unilever Nigeria, and N22.82 million by Neimeth.
According to the World Bank, manufacturing and services contracted in August 2023 due to a lack of confidence on the part of businesses and increased input costs. numerous companies across numerous industries had already announced price increases as a result of the pressure.
On September 13th, Seven-Up Bottling Company Ltd raised its wholesale prices. The price of a case of 12 7UP 50 cl cans went up to N2,400 from N2,250, and the price of a case of 12 Chief Malt 30 cl cans went up to N2,250 from N1,850. The increment in price applied to all of its products.
On November 7th, Google increased the price of a Google One (100 GB) subscription from N3,900 per year to N9,500 per year.
In August, Nigerian Breweries Plc. implemented a company-wide pricing increase. The price of a bottle of Heineken went up from N6,390 to N7,010, the price of a bottle of Gulder from N6,020 to N6,700, 33, and the price of an Export bottle of the same size went up from N4,700 to N5,080.
Losses from the devaluation of the naira have also forced Multichoice Nigeria to apply price increases (its second for the year) across all DStv and GOtv packages. The company blamed foreign exchange challenges in Nigeria and ongoing power outages in South Africa for its third straight semi-annual loss, which was published in the third quarter report.
Subscription growth in the rest of Africa slowed in the first half of fiscal year 24 after gaining 1.4 million new customers in fiscal year 23. Inflationary pressures in key markets like Nigeria contributed to this, as did patterns seen in the years after the last FIFA World Cup and the offseason for football in the Northern Hemisphere.
Furthermore, it stated that “Weaker currencies remained a significant impediment to improvements in profitability,” with average first-half exchanges falling significantly versus the USD.
“The significant amount of the losses recognised on cash remittances are now reported in trading profit as a result of the steep collapse of the naira. The overall impact of these FX fluctuations on the segment’s trading profit for the period was minus ZAR1.6bn.
The premium price for DSTV is now N29,500 from N24,500, Compact Plus is N19,800 from N16,600 and more. The supa plus on GOTV is now N12,500, while the price of Max has risen from N4,850 to N5,700. Those were only a few examples of the price hikes that have occurred in recent months, but on average, costs have increased by far over 50%.
StarTimes, another PayTV service, reportedly raised prices on September 1, 2023. The company, like many before it, stated that the depreciation of the naira and increases in inflation were to blame for the hike.
It raised prices throughout the board, from the N900 Nova to the N1,500 Basic to the N2,500 Classic. That, however, has created a new dilemma for businesses as reduced consumer spending has led to lower sales volume, leading several to consider closing shop.
For example, in a recent interview with our correspondent, Mr. Wale Oyerinde, Director-General of the Nigeria Employers Consultative Association, summed up the situation succinctly: “It is no gainsaying that the operating environment for many businesses has not been favourable, made worse by the ongoing challenges.”
Dr. Solomon Aderoju, chairman of the Nigerian Association of Small and Medium Enterprises in the South-West, said, “When the SMEs produce, they won’t be able to sell because the purchasing power is eroding and people are not buying.”
Since some of us bring in raw supplies from abroad, we should expect to see a rise in the price of those as well. These issues are fatal to SMEs.
Prof. Olusegun Vincent of the Pan-Atlantic University in Lagos, a specialist on financial matters, elaborated: “When the currency rate is floated in a country like ours, we are obliged to face the consequences. The repercussions of this will be seen at all levels of society, from the government to corporations. The impact will be felt by everyone.
When you have portion of your debt denominated in a foreign currency, you leave yourself vulnerable to loss on the corporate level, as many businesses have discovered to their dismay. Many of our businesses have dollar-denominated loans and commitments on their books. Increases in the fair value of such transactions can be attributed to changes in both accounting standards and practises. That is the provision of accounting.”
Dr. Ikenna Nwaosu, a facilitator for the Nigeria Economic Summit Group, predicted that the regulations will lead to the closure of additional businesses.
He predicted that “it will lead to some companies shutting down” in a recent article published by this paper. To begin, businesses will fail if production costs and raw material prices rise above a certain threshold, and consumers refuse to pay the resulting markup.
Many people will halt production, leading to a possible increase in the unemployment rate in the short term. They might be forced to close for a while, starting a chain reaction.
The Federal Government has shut down all of its foreign exchange incentive programmes, and this will result in the closure of many businesses. Finally, it will have an effect on the educational sector because there is currently no exception made for students going abroad. They used to shop at a designated counter but now they shop openly.
A macroeconomic monster is looming over businesses of all kinds across the country. Since there is no guarantee of making a profit, fewer companies are willing to risk their capital in the country. Subsidy reduction and the unification of the naira are expected to improve the country’s economy in the long run, but many firms are worried they won’t survive until then.