6 Economic Challenges And Unpopular Government Policies Threatening Nigerian Businesses in 2020
For Nigerian business owners, the year has been a constant struggle to keep their heads above water.
The COVID-19 pandemic has had its wide ranging effects on Nigerian businesses. Many have had operations shut down or greatly reduced because of the movement restrictions brought on by COVID-19. They have had to deal with reduced cash flow and revenue as consumers now have lesser disposable income (another side effect of the pandemic).
In a survey carried out by FATE Foundation and BudgIT, 22.8% of 1,943 respondents indicated that they were uncertain if their businesses would survive the pandemic, while another 30% were certain that their businesses would not survive the pandemic. Additionally, 80.4% of the respondents reported that they were likely to lay off staff because of poor sales and an inability to pay salaries.
You’ll realise how bleak a picture this is when you consider the 2017 report by the National Bureau of Statistics that says MSMEs (Micro, Small, and Medium Enterprises) employ over 59 million of the 69.09 million strong Nigerian workforce.
From attempting to absorb the shocks of the COVID-19 pandemic to processing the effects of the government policies that have been rolled out, one after another, entrepreneurs have really had a hard time of it in 2020.
Here are some economic factors that are affecting Nigerian businesses this year.
Upward Review of the Value Added Tax Rate
In January 2020, the president signed the Finance Act into law, resulting in an increased VAT rate from 5% to 7.5%. While some MSMEs will have their goods and services exempt from this tax, (the new VAT rate applies to companies with a turnover of over N25 million Naira), it indirectly affects their value chain as well.
In a nutshell, the new VAT rate is already resulting in higher production costs for businesses and a resultant increase in prices that customers pay.
This was included in the reasons given by both Startimes, GOtv and DStv in their recent price adjustments.
Okada and Tricycle Ban in Lagos
On February 1, 2020, the Lagos state government started to implement the ban on commercial motorcycles and tricycles.
This has of course, affected the income of commercial cyclists, causing an estimated 800,000 to become unemployed with no alternative source of income. It has also affected the entire transportation system and worsened the already chaotic traffic situation.
Across the city, transport fares have increased – the Lagos Bus Service Limited (LBSL) and the Bus Rapid Transit (BRT) have also increased bus fares by 46% and 50% respectively citing high operating costs.
Additionally, a report from Naspire further predicts that the increasing cost of transportation would further reduce consumers’ purchasing power as the price of commodities will increase correspondingly.
Unfavourable Government Policies: NBC Code
The National Broadcasting Commission (NBC) recently released an update to the sixth edition of the NBC code.
Amongst other things, the amendment mandates that PayTV platforms, media houses, sport broadcasters, etc should sub-license their rights to exclusive local content, to industry competitors. The NBC will also regulate the price of acquisition.
The implementation of the code will restrict and discourage innovation in local content, and service providers like Netflix, MultiChoice and iROKOtv might start to move their investments out of Nigeria, which could lead to loss of jobs and income for many.
It has already been reported that Supersport, a subsidiary of MultiChoice is already considering not renewing rights to broadcast the English Premier League and the UEFA Champions League in Nigeria when it comes up for renewal in the 2020/2021 season.
Unfavourable Government Policies: NIPOST’s Courier and Logistics Regulation
The Nigerian Postal Service (NIPOST) issued the Courier and Logistics Services Operations Regulation in July 2020 to improve efficiency.
The new regulation was accompanied by steep licensing fees that would affect even SME couriers. Although the licensing fees have been suspended following public outcry, the Courier and Logistics regulation contains other things that raise concern, such as the fact that courier operators will be required to contribute 2% of their annual revenue to the Postal Fund.
For struggling courier companies, this is simply another burden to deal with even as they struggle to survive.
Devaluation of the Naira
On Thursday, August 6, the official exchange rate was again reviewed to N379/$1. However, the Naira has depreciated by as much as N473 to the dollar on the parallel market. Analysts at Goldman Sachs expect further devaluation in the coming 12 – 18 months.
The devalued Naira means that the cost of locally manufactured items will continue to rise, and that the production process will be more expensive for companies depending on imported items to create their goods or services, as they will have to exchange more Naira for the dollar.
Pay-TV operator StarTimes recently announced increased subscription prices and attributed the new pricing to the increased VAT and the foreign exchange rate.
Inflation
The varied and multilayered effects of the pandemic combined with the detrimental effects of the aforementioned policies have made inflation inevitable. Nigeria’s inflation rate has increased to 12.82% in July according to the National Bureau of Statistics, while food prices have also climbed up by as much as 15%.
The soaring inflation rate is already hampering business growth as it is causing businesses to incur higher costs in their operations, which could lead to further unemployment as more staff are laid off in a bid to save money.
Nigeria is currently ranked 139 of 191 countries on the World Bank’s Doing Business Index. Although the Federal Government plans to achieve the 70th position on the Index by 2023, the current situation of unfavourable regulations, multiple tax burdens shouldered by businesses, and the already existing infrastructural challenges suggest that this goal may be a distant dream.
As Nigerian businesses struggle to rebound from economic setbacks caused by the effects of the COVID-19 pandemic, it will require deliberate support and concerted efforts from the government to save businesses. According to a KPMG report, such efforts must include financial relief mechanisms such as corporate income tax rebates, deferral of government payments, and reductions in tax rates to help owners retain more immediate cash in their business.
