Nigeria’s Business Landscape: Runners and Believers

BY FALADE MURITALA ADESOLA

Nigeria’s economic landscape is a paradox. Despite being rich in human and material resources, people and businesses continue to face many challenges, even as key economic indicators have been steadily deteriorating. In the past year, about eight leading international companies from different sectors have either exited the country or announced their intention to exit the country. Given the current stresses in various sectors, especially the repeated financial losses that telecom companies have suffered since last year and their cries for government support, one wonders what the consequences would be for the already strained economy if such companies were to throw in the towel.

The economy functions as a mixed, middle-income economy and an emerging market. It has a wide range of sectors including manufacturing, financial services, communications, technology and entertainment, which contributes to its status as 32nd largest economy in the world in terms of nominal GDP. Although it is now the fourth largest economy in Africa, it still plays a significant role in providing goods and services to the entire West African region.

Ranked 14th in the world for oil production, Nigeria is rich in other natural resources, making it attractive to potential investors looking to explore this largely untapped market. Investment is crucial to the vitality of an economy, which highlights the need to continue investing if the returns on those investments are desired. However, despite these assets and potential, Nigeria’s economy is in a difficult situation. Businesses are struggling. This can be seen in the alarming number of companies withdrawing from the country.

These exits are a symptom of deeper economic problems. Nigeria’s inflation rate has skyrocketed to its highest level in years, posing a serious economic challenge to the country. With an inflation rate of 33.95%, an interest rate of 26.25% and constant foreign exchange challenges, the business environment in Nigeria is becoming increasingly unsustainable. This increase in inflation was accompanied by a significant depreciation of the naira, which reached unprecedented lows, mainly due to acute shortages of the US dollar. These economic pressures not only affect businesses, but also have serious consequences for the broader Nigerian economy and its people.

As a result of these challenges, the prices of basic goods and services have skyrocketed, affecting the daily lives of Nigerian citizens. Necessities such as food, cooking gas, medicines, fuel and public transport have become noticeably more expensive, putting a significant strain on household budgets and causing financial problems for many people.

The situation was exacerbated by Nigeria’s heavy reliance on imported food and fuel, which made the country particularly vulnerable to the sharp rise in global prices resulting from the Russia-Ukraine conflict. These economic difficulties came just as Nigeria was emerging from a recession triggered by the COVID-19 pandemic in 2020, posing additional obstacles to its economic recovery.

As highlighted in 2023 State of the Enterprise (SoE) ReportNigerian entrepreneurs face serious challenges. These challenges include high operational costs resulting from foreign exchange, fuel shortages, removal of fuel subsidies, exchange rate reforms, unreliable electricity supplies and deteriorating perceptions of opportunity. This decline is reflected in a reduced score of 0.64 compared to 0.80 in 2022, indicating a clear shift in business optimism. Even though companies are optimistic about the future, the decline in perceived opportunities reflects a less optimistic outlook compared to the previous year. Additionally, the enabling business environment pillar again received the lowest score of 0.36, suggesting the increasing complexity of doing business in Nigeria.

According to Manufacturers Association of Nigeria (MAN)increased electricity tariffs have led to the closure of more than 300 businesses and the loss of 380,000 jobs in just two months. The tariff hike, which saw rates rise from N68 to N225 per kilowatt-hour for some customer groups, has significantly increased the operating costs of businesses, leading to widespread business closures and job losses.

The government’s economic policies, particularly the removal of electricity subsidies and the increase in exchange rates, have played a significant role in this development. Minister of Power Adebayo Adelabu justified the tariff increase by citing the unsustainable nature of the burden of subsidies of N3 trillion, which has now been reduced to N1 trillion. However, this has not helped to alleviate the operational difficulties faced by businesses.

International companies operating in Nigeria have also been forced to respond to the difficult economic conditions. Procter & Gamble, a well-known consumer goods corporation, announced plans to cease manufacturing operations in Nigeria in light of the difficult operating conditions and depreciation of the naira. Similarly, pharmaceutical giants GSK Plc and Bayer AG have decided to outsource the distribution of their products, a result of the unfavourable economic conditions and currency devaluation. Diageo recently announced its exit from Nigeria through a deal with Tolaram, joining the list of other major companies such as Sanofi, Jumia Food, Bolt Food, Equinor, MABISCO and Unilever, which have all left or are planning to leave Nigeria

Diageo’s recent exit from Nigeria has brought to light concerns expressed by telecommunications companies about the difficulty of doing business in the country and the immediate need for government intervention to prevent sector-wide bankruptcies that could trigger further economic decline. While there are differing opinions on this, with some suggesting that Diageo simply divest its stake in the brewery to focus solely on alcohol production, the basic premise remains that businesses operate to make profits. Therefore, Diageo’s decision to sell its 58.6% stake in Guinness Nigeria to Tolaram definitely confirms the grim reality that no investor will leave the lucrative sector.

If current economic challenges continue, there is a risk of collapse of the telecommunications sector, which could impact other industries. This sector contributes significantly to government revenues, accounting for approximately 24% of payments. Sector contributed 12.52% to total nominal GDP in the fourth quarter of 2023, showing an increase from 10.42% recorded in the same quarter of 2022 and 11.57% contributed in the previous quarter. This sector not only underpins Nigeria’s digital infrastructure, but also has the potential to strengthen the economy. Digitization of key industries could increase Nigeria’s GDP by 2 percentage points by 2028. Additionally, the telecommunications sector has the potential to generate nearly 2 million jobs and increase tax revenues by an additional NGN 1.6 trillion by 2028.

Given the important role of the telecommunications sector in providing key infrastructure and services, its collapse would have broad and far-reaching consequences for the entire economy.

Over the past decade, telecommunications companies have kept their pricing structures unchanged despite growing challenges. Unlike companies in other sectors that have either left the country or adjusted prices to adapt to economic changes, telecommunications operators have shown resilience in maintaining their pricing structures. Unreliable electricity supply has significantly impacted the reliability and progress of services as diesel consumption plays a crucial role. With several locations scattered across the country, much of it relies on generators running 24/7, requiring a continuous supply of fuel. The process of purchasing diesel fuel has become more complex due to the abolition of fuel subsidies, which has resulted in a three-fold increase in fuel prices. This not only directly affects operational costs, but also leads to broader issues such as land availability and infrastructure maintenance. With rising prices in various sectors, the telecom industry is faced with the challenge of providing high-quality services while adhering to strict pricing frameworks.

Getting out of this quagmire requires a multi-faceted approach. First, there is an urgent need for comprehensive policy reforms that address the fundamental problems plaguing the economy. The government must ensure stable economic policies that create a favorable business environment and do not overburden businesses.

Moreover, combating inflation and stabilizing the currency market should be a priority. This could include strategic partnerships with international financial institutions to stabilize the currency and implement policies that control inflation without stifling economic growth. Investments in infrastructure are also paramount. Improving power supply, protecting infrastructure and reviewing tariffs to enable cost-reflective pricing will reduce the cost of doing business and increase the competitiveness of the telecoms sector. Additionally, supporting a supportive regulatory body that promotes ease of doing business in the telecommunications sector will encourage both local and foreign investment.

While the companies that have left the country can be described as “runners”, those that have remained, struggling to stay afloat by continuing to invest, believe in Project Nigeria. At the top of the list of believers are the likes of MTN Nigeria, Dangote, Air Peace and many other companies. While we must commend them for their resilience, faith and love for the country, the government must support them to remain viable because the thought of them failing would indeed be devastating to the entire economy.

Dr Falade Muritala Adesola is a Senior Lecturer and former HOD Faculty of Computer and Information Sciences at Trinity University.

The views expressed by the authors are strictly personal and do not represent the views of TheCable.