Nigeria's economic climate has been particularly turbulent this year. Businesses face numerous challenges, including rising interest rates, inflation, and the depreciation of the Naira. It has become increasingly difficult for businesses to remain afloat and thrive. This year, we have witnessed the exit of some multinational companies such as: Equinor, Nipol Indstries, Moak Industries, Procter and Gamble, etc. According to Patrick Umoh, Multinational companies are exiting or shutting down operations in Nigeria due to economic uncertainties, a challenging business environment, electricity shortages, continual Naira devaluation, high taxes, insecurity, inadequate infrastructure, port congestion, and strict government policies.
Nigerian businesses and SMEs are not unscathed from this challenging economic period. The increasing uncertainty in Nigeria's macroeconomic environment is set to further hinder business activities, leading to more businesses potentially shutting down operations this year. According to Femi Egbesola, the National President of the Association of Small Business Owners of Nigeria, things are deteriorating in Nigeria and no company, whether small or micro, can plan or project for the future now because they rely on stable indices. However, in the words of Paul Tieryas, walking on water is easy if you know where to step.
Strategic decision making is sacrosanct for businesses during this period in order to thrive amidst uncertainties. The aim of this article is to explore the challenges faced by businesses, how businesses are affected by these challenges and how businesses can not only survive but thrive during economic uncertainties despite these challenges.
CURRENT CHALLENGES FACED BY BUSINESSES IN NIGERIA
Starting a business in Nigeria can be both exciting and challenging. Nigeria offers a vibrant and dynamic business landscape filled with opportunities. However, beneath this promise lies a host of challenges that aspiring entrepreneurs must navigate with resilience and determination. The following are some of the challenges faced by businesses in Nigeria:
- Inflation: Nigeria’s headline inflation rate rose to 33.69% in April 2024, its highest level since March 1996, up from 33.2% in March. This marks the 16th consecutive month of accelerating inflation, driven in part by the continued devaluation of the Naira and the removal of fuel subsidies. Food inflation, which constitutes the majority of Nigeria's inflation basket, rose to 40.5% in April, up from 40% in March. The annual core inflation rate, which excludes farm produce and energy, reached a new record high of 26.8% in April.
- High Interest Rate: The Monetary Policy Committee of the Central Bank of Nigeria (CBN) on 21st May, 2024 increased the benchmark interest rate by 150 basis points(1.5%), from 24.75 percent to 26.25 percent. However, the Cash Reserve Ratio (CRR) for Deposit Money Banks (DMBs) remains unchanged at 45 percent. The Monetary Policy Committee also set the Asymmetric Corridor around the MPR at +100 and –300 basis points. Additionally, it maintained the liquidity ratio at 30 percent. Since the MPC resumed meetings this year, this marks the third consecutive increase that has been implemented. Overall, the MPC has raised the MPR by 750 basis points since February. The MPR was initially raised by 400 basis points to 22.75 percent from 18.75 percent in February. It was then increased by 200 basis points to 24.75 percent in March, and most recently by 150 basis points to 26.75 percent in May. The increase of the MPR will make it difficult for businesses to obtain credit from financial institutions. It will also lead to an increase in the price of goods, job cuts and may possibly fuel inflation.
- FX Volatility: Recently, there has been a reversal in the Naira's gains against the dollar in both the official and parallel markets, with it dropping below N1500/$1 at a point. For example, the exchange rate between the Naira and the dollar reached an intra-day high of N1,515 on 13th May 2024, according to data from FMDQ. The last time the intra-day high surpassed the N1,500 mark was on 21st March, 2024, when it closed at N1,598/$1. Since then, it has remained below N1,500. However, this week, the Naira experienced a rebound above N1,500/$1. At the parallel market, there was a notable strengthening of the Naira, with it trading at N1,490 per dollar. This marks a 1.34% appreciation compared to the N1,510/$1 rate observed on Friday.
- Increase in Electricity Tariff: The Federal Government approved a 240% increase in electricity tariffs for customers classified as Band A users. Band A basically includes customers, mainly businesses, who receive electricity supply for between 20 and 24 hours daily. Under the new tariff structure, Band A customers will be charged 225 Naira (€0.17, $0.18) per kilowatt hour (KWh), representing a significant rise from the previous rate of 68 Naira. This hike in tariffs sparked outrage among Nigerian companies, particularly in the manufacturing sector. They warned that many businesses could face bankruptcy as a result of this decision and have demanded a reversal of the tariff increase.
STRATEGIES ON HOW TO THRIVE AS A BUSINESS AMIDST ECONOMIC UNCERTAINTIES
The following are strategies that businesses can adopt in order to thrive during economic uncertainties:
- Advisory: In turbulent markets, one of the key roles of business advisors is to assist companies in anticipating and responding to changes effectively. They achieve this by closely monitoring market trends, analysing data, and evaluating risk factors in order to offer valuable insights into upcoming challenges and opportunities. This proactive approach helps businesses to make informed decisions and adopt their strategies accordingly, reducing risks and increasing their chances of success.
- Diversification of Revenue Streams: Diversification serves not only as a growth strategy but also as a safeguard against market volatility. Businesses that diversify their revenue streams are more resilient in facing economic uncertainty and are poised for sustained success in the long term.
- Local Sourcing and Production: Sourcing raw materials and goods domestically, allows businesses to lessen their reliance on foreign imports. This decreases the need for foreign currency, thereby stabilizing the Naira and alleviating pressure on its exchange rate. Additionally, investing in local industries fosters a stronger domestic economy. This leads to job creation, higher income levels, and economic growth, all of which contribute to currency stability.
- Debt Management: Prioritizing minimizing debt becomes crucial during challenging economic periods. It is important to concentrate on settling high-interest debts initially and explore options like consolidating or refinancing loans to secure lower interest rates. Also, it is important to refrain from accruing unnecessary debt and assess the necessity of significant expenditures carefully.
- Review and Reduce Expenses: During difficult economic periods, it is important to cut back on spending. Conducting a comprehensive review of expenses to pinpoint areas where costs can be reduced without compromising essential operations is important. Business owners may consider renegotiating contracts, shifting to more cost-effective suppliers, and optimizing staffing levels as viable strategies.
In conclusion, despite the unfavourable economic condition in Nigeria, a business can still thrive and not just survive.
Crimson Oak Capital is a business and financial advisory firm focused on driving success for African businesses through tailored financial and business solutions, and strategic investments. We guide clients through intricate transactions like M&A, joint ventures, growth planning and strategic partnerships. Our hands-on approach includes thorough due diligence, financial analysis, business model remodeling, and simulated pitch meetings, empowering clients to confidently make informed decisions.
