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Nigeria’s private sector struggles with economic impact of COVID-19, inflation, devaluation

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CBN Governor, Godwin Emefiele

The COVID-19 crisis has brought with it disastrous economic effects. As the virus continues to spread, business and world economies have been experiencing a huge decline in revenue. According to KPMG, about 94 per cent of the Fortune 1000 across the world, including Nigeria, have experienced some sort of COVID-19 disruption.

As with other pandemics and epidemics like Ebola and Zika, it is expected that this one will also eventually die out. However, it is projected that the economic impact of this pandemic will be felt long after the virus has been forgotten.

The “Nigeria In Times of COVID-19: Laying Foundations for a Strong Recovery” report projects that the economy of the country will likely reduce by 3.2 per cent if the pandemic is curtailed in the country before the third quarter of the year. However, if the pandemic worsens, the number could be higher.

The Naspire 2020 Half-year Business Insights reported that Foreign Direct Investment only accounted for 3.66 per cent ($214.25 million) of the total capital inflows; this was representative of a decline of 16.72 per cent in FDI from Q4 2019. The Nigerian Stock market also experienced effects first hand. It was reported that investors lost over NGN2.3 trillion (US$5.9bn). This was within three weeks of the announcement of the first case of coronavirus in Nigeria on January 28, 2020.

Before the pandemic, the economy of Nigeria was expected to grow by about 2.1 per cent this year. This means that the pandemic alone has effected a drop in economic growth by about 5 per cent. The effect of this on the macroeconomics of the country is huge, especially with the crash of Oil, which is the major source of revenue in Nigeria.

In mid-August 2020, the United Kingdom officially entered into its first recession since 2009. Reacting to the news on Twitter, Tunji Andrews, an economist and business analyst said, “Nigeria will join soon as will most of the world. Recessions hardly ever happen in a vacuum. One event may be the catalyst but there are usually events unfolding up to it. For the UK, it was BREXIT then COVID-19. For Nigeria, it was the madness in the oil market and then Covid-19.”

Oil alone accounts for about 80 per cent of the nation’s export, 30 per cent of credit in its banking sector, and about half of the overall revenue of the nation. Now, putting into account the crash of this major source of income, the nation’s revenue is expected to drop by a further 3 per cent from the already low 8 per cent in 2020 alone. This is at a time when public spending is expected to reduce in order to curtail the effects of the pandemic on the country and its citizens.

In a virtual meeting with Chief Executive Officers (CEOs) of conglomerates in May, CBN Governor, Godwin Emefiele explained that the CBN, in line with President Muhammadu Buhari’s desire, was determined to return the Nigerian economy to the period when the manufacturing and agricultural sectors formed the base of the economy.

“As Nigeria continues the process of the full reopening of its economy due to the lockdown over Coronavirus (COVID-19), the nation needs industrial conglomerates to support efforts aimed at growing the Nigerian economy,” he said.

While acknowledging the challenge Nigeria faces with low crude oil prices, Emefiele expressed confidence that the price of crude would not remain at low levels for a long period. According to him, Nigeria’s foreign reserves of about $37 billion remained robust to support the economy. However, beyond the CBN Governor’s statements, reduced crude oil prices and reduced demand have greatly affected the health of the Nigerian economy.

Apart from the public sector, the pandemic has also hugely affected the private sector. The increased uncertainty has greatly reduced investments in the country and also expected to cut down on remittances to households in the country.

Generally, studies have shown that apart from the great loss of lives, the pandemic will most likely increase the number of Nigerians living in poverty by an estimated 5 million as opposed to the 2 million, which was earlier projected.

This crisis isn’t peculiar to Nigeria or developing countries alone. According to the World Bank, COVID-19 is expected to reduce the economies of advanced countries by a whopping 7 per cent. This will definitely spill over into developing economies which are projected to reduce by at least 2.5 per cent. These numbers are the worst projections for these economies in at least the last 60 years.

All these projections in 2020 have caused a huge shift in costs, demands, and supply, thereby rendering the previously predictable market pricing mechanisms obsolete. To combat this, companies in the private sector are having to get innovative in order to not just adapt to the changes in their customers’ needs, but also consider the long-term implications of their decisions. Additionally, they also have to contend with unfavourable government regulations which directly affect their businesses or the purchasing power of their target customers.

A very good example is the pay-TV sector in Nigeria, which is not necessarily an essential service, but more of a luxury good. The industry regulator, National Broadcasting Commission (NBC) recently introduced amendments to the Nigerian broadcasting code, which includes sections that state that,
“In the broad national interest, exclusivity of sporting rights in Nigeria is prohibited,” thereby prying exclusive content from companies that pay millions of dollars for them.

Since the announcement in June, the new NBC code has received wide condemnation from industry stakeholders, filmmakers, entertainment content producers and operators who naturally justify their value to subscribers through their ownership of exclusive content.

According to the NBC, this amendment was introduced to promote “effective competition in the broadcast industry in Nigeria.”

However, since the primary objective of owning a company is to make a profit, these companies now have to come up with strategies to keep them from drowning and packing up shop, especially if you add the complications of COVID-19 and effect of macro-economic factors such as inflation at 12.4 per cent, naira devaluation amongst others.

Tunji Adegbite, an analyst and founder of research firm Naspire says, “According to PwC, Nigeria will be the world’s fastest growing entertainment and media industry over the next five years, however, the controversial NBC Broadcast Code remains a threat to future growth.”

Looking at things from the perspective of the Pay TV, operators have to get ‘raw materials’, which in this case are contents from rights owners like Zee world, English Premier League, Spanish La Liga and German Bundesliga, to name a few. As a result of the ongoing pandemic amongst other variables, the costs of these raw materials are increasing. For instance, the cost to broadcast the EPL has risen by almost 8 per cent from a sum of about 9.2 billion pounds ($12 billion). In a perfect market, it is expected that the cost of the finished product which in this case is the viewing of these matches by subscribers in the comfort of our homes, is to be increased by a corresponding percent or more.

This, coupled with the reduction of purchasing power of consumers due to the pandemic, inflation and job losses, thereby reduces the number of consumers/demand. It is only expected that one of the necessary actions to take will be to increase tariffs to be able to meet up with the budgets of the various companies.

Startimes increased the average price of its subscription by over 20 per cent at the beginning of August. In explaining, the company’s Brand and Marketing Manager, Viki Liu said the price increase is due to increased value-added tax (VAT), which went from 5 percent to 7.5 percent, as well as the foreign exchange rate which has impacted its operational costs.

“Our business is not exempted from the effect of the Naira depreciation affecting all businesses in the country. All of our foreign content is bought in dollars and to continually serve our subscribers the best content, the subscription price has to be reviewed upwards,” Liu added.

Pundits say it is likely that MultiChoice, Nigeria’s leading Pay TV operator, will have to make price adjustments if things do not improve.

Beyond Pay Tv, transportation costs have also increased. In Lagos for example, the Lagos Metropolitan Area Transport Authority unexpectedly increased the prices of bus fares in July. According to the state government, the price hike was the only way to prevent the transport business from going under. Abiodun Dabiri, LAMATA MD, noted that the monies being expended by the operators on fuel, oil, and tyre had increased by 71 per cent, 64 per cent, and 90 per cent respectively.

In air travel, the Federal Airports Authority of Nigeria (FAAN) recently raised Passenger Service Charge (PSC) by 100 per cent for both domestic flight passengers and international travelers. Similarly, the toll rate of prepaid users accessing the Murtala Muhammed International Airport (MMIA) was increased by 300 per cent. Airfares have also significantly increased since domestic flights resumed after the lockdown, with some airline operators raising prices by as high as 50 per cent.

In consumer goods, the reported prices of local food materials shows a significant increase in the cost per unit of items. A 50kg bag of rice previously sold for N18, 000 is now N21, 000, while a paint bucket of Garri that was previously sold for between N300 – N350, is now being sold for N1, 300.

Another way to look at the situation will be from the angle of the employees of the various companies. In the event that the projected revenues by these companies are unmet, they will have to cut down on their budget. And if they plan on staying in the market, then the next reasonable course of action will be to reduce expenses amongst which human resources is one. By laying off employees, they might be able to achieve their projected profit margin, however, they will also be increasing the unemployment rate of the country and therefore the purchasing power of the citizens/consumers. It is a vicious circle.

According to Jonathan Lavender, KPMG’s Global Head of Private Enterprise and Head of Markets, “It has become necessary for governments to introduce incentives and economic relief programs that help alleviate business stress and bolster economies. Additional financial relief mechanisms include corporate income tax rebates, deferral of government payments, and reductions in tax rates to help owners retain more immediate cash in their business.”

Countries like Japan, China, Israel, Ireland and Canada have introduced incentives and economic relief programs to help alleviate business stress and bolster their economies post-COVID. Such programmes include interest-free, non-collateral loans, corporate income tax rebates, deferral of government payments, and reductions in tax rates to help owners retain more immediate cash in their business.

Stakeholders in the Nigerian business sector are also calling for strategies, policies, and financial infrastructure, to help the economy get out of this slump. If conditions remain until the end of the year, it could invite long-term distress, running into the coming years.


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