How Covid-19, Inflation, Devaluation, Unfavourable Economic Factors Are Creating Hell For Nigerian Businesses
The wobbly economic situation that many Nigerians struggled to cope with before the Covid-19 pandemic appears to have gotten even worse. As lockdowns ease across the world and economic activities slowly pick up, Nigeria seems to be diving deeper into an uglier version of the pre-pandemic economy.
The United Kingdom, France and Italy have slumped into recession, just as predicted by the World Bank in its June 2020 Global Economic Prospects, and many nations across the world will suffer similar economic fates due to the pandemic.
The World Bank forecasts that the global economy will shrink by 5.2 percent this year which would represent the deepest recession since the Second World War.
While nations across the world wait their turn to officially enter into recession, the jury is still out on whether Nigeria’s economy is already in recession.
Months before the pandemic, the nation’s economy had been grasping for breath. The continuous depreciation of the Naira and the collapse in oil prices, a ripple effect of the Covid-19 pandemic, is now expected to plunge the Nigerian economy into a severe economic recession, which according to the World Bank, would be the worst since the 1980s.
The World Bank, World Economic Forum (WEF) and the Central Bank of Nigeria (CBN) have said it may take a longer time before things return to where they were for Nigeria before the coronavirus shock. The journey to recovery will take long and as expected, jobs are constantly being lost in different sectors of the economy as organisations struggle to keep workers on their payroll and sustain their business.
In the face of these factors: naira devaluation and fluctuating exchange rates, the effects of COVID-19, inflation at 12.4 percent, and increase in VAT to 7.5, and without the needed government assistance, we may just be bidding farewell to many businesses in Nigeria as they drown in the myriad of problems that 2020 has brought on, and are hollowed out of the economy forever.
The continuous devaluation of the Naira against the dollar (N380 official rate and N470 in the parallel market as at Tuesday August 12), which is the global trading currency for many organisations who rely on international trade for their businesses, has had a disastrous impact on businesses and industry. The final consumers are to bear part of the brunt while businesses take the larger chunk, making the chances of survival for businesses in Nigeria more slimmer than ever before.
Ordinary Nigerians ultimately bear the brunt, as businesses – both big and small – have to pass on the additional production and operational costs to the paying customer through price increases.
With business running costs now increasingly higher with the hike in petrol price from N123.5 to N143.5 by the Petroleum Products Pricing Regulatory Agency (PPPRA) without prior notice, it is expected that many businesses will start adjusting their prices to conform with the present reality.
This is why the likes of Pay TV company StarTimes announced about 30 percent increase in the price of its subscription to reflect the 2.5 percent increase in VAT from 5 to 7.5 percent while also bitterly lamenting the fluctuating exchange rate.
“Earlier this year, the Federal Government increased the rate of the Value Added tax (VAT) from 5% to 7.5%. This increase did have an effect on our cost of business but in consideration of customers; plight, we have continued to bear the extra cost,” StarTimes said in a statement on July 10, 2020.
The statement added: “More recently is the impact of the foreign exchange rate; our business is not exempted from the effect of the Naira depreciation affecting all businesses in the country. Our foreign content is bought in dollars and to continually serve our subscribers the best content, we regret to announce that the subscription price has to be reviewed upwards. Unfortunately, these external factors are beyond our control, we are forced to adjust to the realities before us.”
The move made StarTimes, which is jointly funded by the Federal Government-owned Nigerian Television Authority (NTA) and the Chinese-government backed Pay TV company, the first in the broadcast industry to announce an increase in prices due to the unbearable cost of running their business. One can only imagine what’s to come from other operators in the Pay TV market, consumer goods and other sectors.
In the transport sector, another state-financed company, the Lagos Bus Service Limited (LBSL) and the Bus Rapid Transit (BRT) operated by the Lagos government used to run the cheapest fares in the city. When the management of the two transport companies could also not bear the high cost of running the business despite being a government operated system, BRT announced a 50 percent increase in its fares in May while the LBSL increased its fares by 46 percent in June after the lockdown was eased in the state.
Justifying the increase, the Managing Director, Lagos Metropolitan Area Transport Authority (LAMATA), Abiodun Dabiri, said the government approved the fare increase to save the bus scheme from collapse as the operators’ expenses on fuel had gone up by 71%, oil by 64 % and tyre by 90.
Nigeria’s biggest retail market – Shoprite also made a shocking announcement a week ago revealing its plan to divest from its Nigerian operations after 15 years, because it is also running at huge loss.
“The unprecedented crisis requires an equally unprecedented policy response from the entire Nigerian public sector, in collaboration with the private sector, to save lives, protect livelihoods, and lay the foundations for a strong economic recovery,” said Marco Hernandez, World Bank Lead Economist for Nigeria.
According to Epiq, a leading global legal services firm, more than 3,600 companies filed for bankruptcy in the first half of 2020 and recently, one of the world’s leading airlines – Virgin Atlantic also filed for bankruptcy.
The pandemic which has slowed down growth, the depreciation of Naira, increase in taxes, high business running costs and inflation have created a worse version of new normal for small, medium and large firms. This new normal has necessitated the need for price adjustment to conform with the present reality if the businesses don’t want to go down the path of bankruptcy. As expected, everyday Nigerians too have started feeling the pain.
