Sometime in April 2018, Christian Sewing was appointed Deutsche Bank’s new CEO. After his first address to the employees, one of the screaming headlines reads: “New Deutsche Bank boss says tough decisions lie ahead”.
The situation Deutsche Bank found itself then is no different from what many companies in Nigeria are passing through now and, like that time, tough decisions lie ahead.
Just like the CEO telling employees that the German’s biggest lender faced “tough decisions” while working to return to the lane of profitability, hyperinflation, and currency fluctuations despite the Central Bank of Nigeria (CBN) floating the Naira, are chief among reasons businesses in Nigeria are leaning towards tough decisions.
It has been about five months since President Bola Ahmed Tinubu announced an end to decades-long fuel subsidy regime and four months since the CBN allowed the naira to float, yet these actions seem to have compounded the harsh times faced by businesses.
Fuel Subsidy Removal Caused 20%-100% Hike in South West Inter-State Transport Fares
CBN rat race and Naira’s fate
On a global scale, the combination of mounting geo-political risks and Fed rates expectations rocked global financial markets weeks ago. The volatility is likely to intensify over the next few days as investors not only focus on these key themes but on leading economic reports from Nigeria and across the globe highlighting other high-risk events.
World Bank Warns of Potential Increase in Poverty amid Removal of Fuel Subsidy
The CBN’s recent removal of FX restrictions on 43 items sparked some optimism as dollar supply surged. This development offered an opportunity for the Naira to position as though it would fight and was also welcomed by the International Monetary Fund (IMF) which acknowledged the series of reforms aimed at fixing Nigeria’s economy.
Nevertheless, inflation remains a piercing issue for Africa’s largest economy while interest rates are currently at their highest levels since the monetary policy rate was adopted in 2006. It is worth keeping in mind that the inflation menace continues to draw strength from the removal of fuel subsidy on PMS, devaluation of the Naira, and security issues in regions reputed as food production hot beds.
Given how inflation jumped in September to 26.72%, the CBN is likely to raise interest rates at its policy meeting this week for the fifth consecutive time.
This vicious cycle of rising inflation and interest rates certainly presents a risk to Nigeria’s fragile economy. And the question is whether the CBN will move ahead with a 25bp hike or opt for a larger move to tame inflation.
The floating of the Naira has also seen the currency get devalued with exchange rate against the dollar rising officially to 802/$1 and unofficially to over N1200/$1, up from the prevailing N461/$1 rate a few months ago.
Adding to the major impact of the foreign exchange is the increase in energy costs including prices of petrol, diesel and a proposed increase in electricity tariffs.
Diesel generators have long been the primary source of power for businesses in Nigeria and the price per litre is fluctuating between N850 and N1,000 at the moment.
Meanwhile, petrol which is primarily used to power vehicles and homes (via generators due to the perennial epileptic state of electricity), now hovers between N578 (NNPC price) and N650 (independent marketers), an increment of over 200% when compared to Q1 2023, stemming from the subsidy removal policy of the new government.
Also, efforts are in progress to increase electricity tariffs for households and businesses which will be felt across the formal economy, as businesses grapple with the increased cost of operations.
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With energy being a critical part of operations for most companies in telecommunications, media, banking, manufacturing, and tech, the impact on the bottom line is huge when the cost of diesel, petrol, and power subscriptions are factored into monthly and annual expenditures. More unsettling is the fact that inflation, as far as Nigeria is concerned, has continued to grow on a monthly basis.
For businesses in Nigeria, grappling with the triple threats of inflation, currency devaluation, high diesel and petrol costs as well as the impending further electricity tariff adjustments, has made achieving profit margins become a formidable challenge. Some major businesses have already reported huge losses at the end of Q2 2023.
NIGERIA: Inflation Rises to 26.72% in September, Compounds Pressure on Businesses, Households
Nigeria’s burgeoning digital economy is feeling the effects of these cost pressures. As one of Africa’s largest ICT markets with a substantial number of telecom subscribers and internet users, the impact is being keenly felt as telecom operators, data centre providers, and even companies with requisite ICT infrastructure grapple with these high costs.
At a time when digital transformation is hailed as essential for economic productivity and the economy remains plagued with low growth, the ICT sector is being squeezed by the rising costs it is struggling to pass on to both businesses and consumers.
Unlike traditional brick-and-mortar establishments that can cut down on service hours and adopt hybrid work templates, networks, and data centers must operate 24/7, round the clock, regardless of whether they serve a handful or millions of customers.
This round-the-clock operation places immense cost pressures on these companies even as they face slow growth with a high inflationary economy.
Tough decisions lie ahead
Tough decisions to respond to the current challenges lie ahead for data service providers, manufacturers, FMCGs, and other businesses that increasingly rely on digital infrastructure to operate.
Unilever Faces Tough Quarter Amidst Inflation, Escalating Costs
In a market already faced with significant skills deficits further eroded by the “Japa” syndrome whereby young and experienced professionals leave the shores of the country in droves in search of a better life, outsourcing these services is becoming a more attractive alternative to the high overhead of running infrastructure in-house. Despite the fact that prices for the service providers are going up just like everything else in the market, these services continue to deliver cost-saving measures to customers due to economies of scale in their operations along with required efficiency level.
As the year draws to a close and businesses chart their strategies for the coming year, they must make difficult decisions to navigate the turbulent waters that lie ahead.
Balancing the need for profitability with the reality of soaring costs will remain a formidable challenge for some time yet, maybe even for months.
Of course, newbie CEOs are taking classes on ‘Tips to glide through tough business situation’ while the experienced ones are dusting up their notes in an unending search for how to survive through these rough times.
For Nigerians, it is clear that wailing would be of no use when the job cuts happen. So far in 2023: More than 176,630 workers in U.S.-based tech companies (or tech companies with a large U.S. workforce) have been laid off in mass job cuts, according to a Crunchbase News tally.
In 2022: More than 93,000 jobs were slashed from public and private tech companies in the U.S.
In Nigeria, new methodology of National Bureau of Statistics (NBS) puts Nigeria’s unemployment rate at 4.1% in Q1 2023 and 5.3 percent in the previous quarter.
Despite ‘debasing’ the unemployment metrics, we know that the net will no longer contain the fish soon as many people are sent to the job market daily due to the ailing economy.
Experts would advise: “The best business survival step in tough times is to not lose your existing customers at any cost”.
But what about in a situation where the customer can’t afford the services anymore. It is a dire situation for businesses and Nigerians must be prepared for the storms gathering unless something drastic is done. And that must be brought to bear urgently, too.
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