How FG can stop local businesses from crashing and foreign companies from exiting

4 months ago 7

Editor's note: Dr. Falade Muritala Adesola urges the government to ensure stable economic policies that foster a conducive business environment and do not unduly burden businesses.

The Nigerian economic landscape is a paradox. Despite being rich in human and material resources, people and businesses continue to face multiple challenges, even as key economic metrics continue to decline.

In the past year, around eight top multinational companies across various sectors have either exited the country or announced their intentions to leave.

Given the current strain across sectors, particularly the recurrent financial losses that telcos have suffered since last year and their outcry 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 operates as a middle-income, mixed economy, and an emerging market. It has an extensive range of sectors including manufacturing, financial services, communications, technology, and entertainment, all of which contribute to its status as the 32nd-largest economy in the world in terms of nominal GDP.

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Although it now stands as the fourth-largest economy in Africa, it continues to play a significant role in providing goods and services for the entire West African region.

Nigeria, ranking 14th globally in oil production, is rich in other natural resources, which makes it attractive for potential investors looking to explore this largely untapped market.

The investments are crucial for the economy's vitality, emphasizing the need for continued investment if the returns on these investments are desired. Yet, despite these assets and potentials, Nigeria’s economy is in distress.

Businesses are struggling. This is evident in the alarming number of companies withdrawing from the country.

These exits are symptomatic of deeper economic issues. The inflation rate in Nigeria has skyrocketed to its highest level in years, marking a significant economic challenge for the country. With an inflation rate of 33.95%, an interest rate of 26.25%, and persistent foreign exchange challenges, the business environment in Nigeria is becoming increasingly untenable.

This surge in inflation has been accompanied by a substantial depreciation of the naira, which has reached unprecedented lows, primarily due to acute shortages of the US dollar. These economic pressures not only affect businesses but also have severe consequences for the broader Nigerian economy and its people.

As a result of these challenges, the prices of essential goods and services have experienced a sharp increase, impacting the daily lives of Nigerian citizens. Necessities such as food, cooking gas, medicines, fuel, and public transportation have become notably more expensive, placing considerable strain on household budgets and causing financial distress for many.

The situation has been exacerbated by Nigeria's heavy reliance on imported food and fuel, which has made the country especially vulnerable to the soaring global prices resulting from the Russia-Ukraine conflict.

These economic difficulties emerged just as Nigeria began recovering from a recession induced by the COVID-19 pandemic in 2020, posing additional obstacles to its economic revival.

As highlighted in the 2023 State of Enterprise (SoE) report, Nigerian entrepreneurs are facing severe challenges. These challenges include high operational costs resulting from foreign exchange, fuel shortages, the removal of fuel subsidies, exchange rate reforms, unreliable electricity supply and a decline in the perception of opportunities.

This decline is reflected in the reduced score of 0.64, down from 0.80 in 2022, indicating a notable shift in business optimism. Despite businesses remaining optimistic about the future, the decline in the perception of opportunities reflects a less hopeful outlook compared to the previous year.

Additionally, the enabling business environment pillar again received the lowest score of 0.36, suggesting the growing complexities of conducting business in Nigeria.

According to the Manufacturers Association of Nigeria (MAN), the increased electricity tariffs have resulted in the closure of over 300 companies and the loss of 380,000 jobs within just two months.

The tariff hike, which saw rates jump from N68 to N225 per kilowatt-hour for certain customer bands, has significantly increased operational costs for businesses, leading to widespread closures and job losses.

The government’s economic policies, particularly the removal of electricity subsidies and the hike in foreign exchange rates, have played a significant role in these developments.

The Minister of Power, Adebayo Adelabu, justified the tariff increase by citing the unsustainable nature of the N3 trillion subsidy burden, which has now been reduced to N1 trillion. However, this has done little to alleviate the operational difficulties faced by businesses.

Multinational companies operating in Nigeria have also been compelled to respond to the challenging economic environment. Procter & Gamble, a prominent consumer goods corporation, has announced plans to discontinue its manufacturing operations in Nigeria in light of the tough operating conditions and the depreciation of the naira.

Similarly, pharmaceutical giants GSK Plc and Bayer AG have decided to outsource the distribution of their products to third-party entities, a move stemming from adverse economic conditions and currency devaluation.

Recently, Diageo announced its exit through a deal with Tolaram, joining a list of other major companies such as Sanofi, Jumia Food, Bolt Food, Equinor, MABISCO, and Unilever, all of which have either left or plan to leave Nigeria

The recent departure of Diageo from Nigeria has brought to the forefront the concerns expressed by telecom companies regarding the difficulties of conducting business in the country and the immediate need for government intervention to prevent sector-wide failures which could trigger further economic decline.

Although there are differing opinions on the matter, with some suggesting that Diageo is simply divesting its brewery shares to concentrate solely on liquor manufacturing, the fundamental premise remains that businesses operate to make profits.

Therefore, Diageo's decision to sell its 58.6% stake in Guinness Nigeria to Tolaram strongly confirms the dire reality, as no investor will leave a lucrative sector.

If the prevailing economic challenges persist, there is a looming risk of the telecommunications sector collapsing, potentially affecting other industries. The sector contributes significantly to government revenue, accounting for approximately 24% of payments.

The sector contributed 12.52% to the total Nominal GDP in the fourth quarter of 2023, showing an increase from the 10.42% recorded in the same quarter of 2022 and the 11.57% contributed in the preceding quarter.

This sector not only forms the foundation of Nigeria’s digital infrastructure but also has the potential to strengthen the economy. The digitalisation of key industries can boost Nigeria’s GDP by 2 percentage points by 2028.

Additionally, the telecom sector has the potential to generate nearly 2 million jobs and increase tax revenue by an additional NGN 1.6 trillion by 2028.

Given its essential role in providing critical infrastructure and services, a telecommunications sector failure would have widespread and far-reaching consequences across the economy.

Over the past decade, telecommunications companies have kept their pricing structures unchanged despite facing increasing challenges. In contrast to businesses in other sectors, which have either left the country or adjusted prices to adapt to economic changes, telecom operators have been resilient in maintaining their pricing structure.

The unreliable electricity supply has significantly impacted service reliability and progress, as diesel consumption plays a crucial role. With several dispersed sites across the country, a considerable portion rely on generators running 24/7, necessitating a continuous fuel supply.

The process of purchasing diesel has become more complex due to the removal of fuel subsidies, causing fuel prices to triple. This not only directly affects operational costs but also leads to broader issues such as site accessibility and infrastructure maintenance.

As prices rise in various sectors, the telecom industry grapples with the challenge of providing high-quality services while adhering to restrictive pricing frameworks.

The way out of this quagmire requires a multifaceted approach. First, there is a critical need for comprehensive policy reforms that address the underlying issues plaguing the economy. The government must ensure stable economic policies that foster a conducive business environment and do not unduly burden businesses.

Furthermore, tackling inflation and stabilising the foreign exchange market should be top priorities. This could involve strategic partnerships with international financial institutions to stabilise the currency and implement policies that control inflation without stifling economic growth.

Investment in infrastructure is also paramount. Improving power supply, protection of infrastructure, and tariff review to enable cost-reflective prices will reduce the cost of doing business and enhance the competitiveness of the telecoms sector.

Moreover, fostering a supportive regulatory body that promotes ease of doing business in the telecoms sector will encourage both local and foreign investments.

While the companies that have exited the country can be described as the 'runners', those that have stayed back, struggling to keep their heads above water while continuing to invest, are believers in Project Nigeria. Top on the list of believers are the likes of MTN Nigeria, Dangote, Air Peace, and a host of other companies.

While we must commend them for their resilience, faith, and love for the country, the government must support them to stay viable, as the thought of them failing would indeed be catastrophic for the entire economy.