The Nigerian economy has been bedevilled by several macroeconomic doldrums, which have affected the operations of several organizations, threatening a spree of downsizing and rightsizing amidst a decline in margins.
Businesses have been constrained by the high-cost environment of the Nigerian economy especially in recent times, with the headline inflation rate already at a 17-year high of 21.47% in November 2022, an increase of 584 basis points compared to 15.63% recorded at the end of last year.
The high inflation rate is printed on the back of the high cost of energy following the Russian-Ukraine war earlier in the year, the depreciation of the local currency as a result of the crunch in forex supply in Nigeria. The combination of these factors has seen businesses bled in recent months, while more and more individuals have been pushed below the poverty line.
According to the World Bank, the number of poor people in Nigeria will hit 95.1 million by the end of 2022, while the NBS estimates about 133 million Nigerians to be multi-dimensionally poor, representing over 60% of the population.
This is yet to factor in the impact of high and multiple taxations on the profit of these businesses, which is threatening to send them out of business, risking a huge withdrawal from the Nigerian market.
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A cursory analysis of Nigeria’s macro numbers shows disheartening metrics which has constrained the operations of businesses across most sectors of the economy.
Economic doldrum threatening growth of business
The local currency against the US dollar has experienced better days, characterized by its 24.2% year-to-date decline at the black market and 3.5% depreciation at the official Investors and Exporters window. The decline in FDIs and FPIs has placed a huge strain on FX liquidity in the country, while the CBN continue to intervene in the official market at the expense of the international reserve.
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- This intervention is however not enough to meet the insatiable demand for forex in the country, especially for businesses operating in the industrial, manufacturing, and ICT sector, who rely on FX to import materials and machinery.
- The depreciation of the naira against the US dollar has seen the cost of production of manufacturing companies as well as the operating cost of other service companies take a big hit, affecting the profitability of the companies.
- In the same vein, a review of the operating cost of some quoted ICT companies listed on the Nigeria Stock Exchange shows a significant increase in transportation and energy cost. For example, CWG, an IT service provider spent a sum of N21.17 million on transport and travelling expenses between January and September 2022, a 58.5% year-on-year increase.
- In the same vein, energy and oil expenses for the period surged by 90.5% to N23.24 million in the same period.
Also, MTN Nigeria one of Nigeria’s major telcos saw its maintenance costs jump to N19.48 billion in the nine-month period of 2022. NCR Nigeria PLC on the other hand spent a sum of N1.47 billion on travelling and accommodation in 9-month 2022, over a 400% year-on-year increase.
The cost of diesel has almost tripled between January and to date. According to the NBS, the average cost of diesel per litre has skyrocketed by 176% between January and October 2022, while petrol prices have also risen from an average of N165/ltr to as high as N200/$1 depending on the region.
Implication for companies and the economy
The macro and socio-economic issues affecting the cost of doing business in Nigeria have some implications on the operation of businesses in the country and by extension on the country at large. Some of these implications include:
Decline in margins
- Some companies in the ICT sector and other industries have suffered a decline in their profit margins in recent times owing to the increase in the cost of production and operating expenses.
- Chams Plc, a technology solutions company recorded a gross profit margin of 20.6% in 9-month 2022 for example, which is lower than the 24.1% recorded in the corresponding period of 2021.
- Notably, businesses that spend a huge chunk out of their revenue to make up for the rising cost of production and operating expenses will see their profit margin drop, which would reduce the number of dividend payouts to shareholders, and as a consequence discourage participation in the local equities market.
Impact government tax revenue
- When companies’ profit decline, it could affect the amount of taxes remitted to the government. Data from the National Bureau of Statistics (NBS) showed that the manufacturing and ICT sectors topped the list of sectors with the highest company income tax (CIT) remittances in the first half of 2022.
- Specifically, the manufacturing sector remitted a sum of N219.25 billion as CIT between January and June 2022, while the ICT sector remitted N185.09 billion in the same period. Both are on top of the list.
- If businesses suffer profit loss, it affects government revenues, especially at a time when the Nigerian government needs more revenue to fill its fiscal deficit. The Nigerian federal government has been running a fiscal imbalance for the past eleven years.
- Another major implication of the hard business operating environment is that businesses that do not wish to risk recording a loss would increase the prices of goods or cost of services, which will lead to further inflation in the country.
- Companies in the manufacturing sector are already passing on the high costs to the final consumer, which is reflected in the sudden spike in their revenue in the year under review.
It is also worth adding that this turn of events could have a ripple effect on foreign investments, as the high inflationary environment gives a bad indication to foreign investors and discourages those who are already operating in the country.
What this means: Following the impact of the lingering high operating environment ravaging businesses in the ICT sector and other industries of the Nigerian economy, it would be impossible to give sustained value to all stakeholders if prices are not reviewed upward in the coming months.
- This is important considering that some of the stakeholders, in this case, are also employees of the companies, and any business who do not wish to reduce staff cost would need to increase revenue to maintain appreciable margins in light of these troubling macro numbers.
- Shareholders also demand value for their investments, and consumers also deserve sufficient value for their money, while the government requires value in form of taxes.
Originally Posted By Nairametrics