BEVERLY HILLS, April 19, (THEWILL) – The upward trend of inflation rate in Nigeria is not a good omen. Nigeria recorded 18.17 percent rise in inflation rate in the month of March 2021 as against 17.33 percent in February and 12.26 percent in March 2019. It is the highest inflation rate in four years. The underlying message is that businesses are faced with tough times for the remaining three quarters of the year – or what may be referred to as ‘3 Quarters of Pains’. This is because, inflation touches every aspect of our lives and makes businesses more expensive as they make choices in their everyday activities.
With the rising trend in inflation, it is obvious that businesses across all sectors will walk a tight rope to survive what appears an extremely tough macroeconomic environment which the raging upward inflationary trend create. With distraught operators wriggling out of the turbulences first quarter that ushered in one of the most challenging years in recent times, more businesses will be forced to downsize, cut operating expenses and lay off staff or close shop. The worst hit will be the micro, small and medium enterprises (MSMEs) known as the engine of the economy as they embrace higher operating expenses, declining profits, shrinking opportunities and extraneous regulatory pressures.
The MSMEs as suppliers to major businesses will no longer enjoy the opportunity of large orders which earns them bigger returns. For instance, hotels that depend on high customer patronage will witness less room bookings. That means they will reduce the level of goods and services they source from their suppliers – such as food and drinks, transport services, newspapers and periodicals. They will also reduce the number of vehicles in their fleet, which will affect the services of drivers and mechanics.
The National Bureau of Statistics (NBS) inflation report for March 2021, revealed that the major drivers of the raging inflation rate are food and transportation. Data published by the statistics bureau revealed that composite food index rose by 22.95 percent in March 2021 compared to 21.79 percent in February. Beside food is transport, health and maintenance services.
A major concern centres on the worsening insecurity across the country which shows no signs of abating. The major casualties are farmers. Reports indicate that many farmers, especially in the Northern part of the country, particularly North East, have abandoned their farms over attacks by terrorists, bandits, herdsmen and kidnapping. On a daily basis, people are either killed or kidnapped making farming a dangerous undertaking. In some states, like Niger, Borno and Katsina, farmers are forced to pay ‘tax’ to bandits to allow them to harvest their crops or transport their commodities to the markets and other outlets.
The few transporters that brave it do so at a great risk to their lives and their vehicles. According to reports, vehicles carrying food items from Borno to Lagos state encounter over 90 check-points at which they are forced to pay tolls. This is not going to abate in the ‘3 Quarters of Pains’ as experts predict higher rate of inflation in the year.
“The highest increases were recorded in prices of Passenger transport by air, Medical services, Miscellaneous services relating to the dwelling, Passenger transport by road, Hospital services, Passenger transport by road, Pharmaceutical products, Paramedical services, Vehicle spare parts, Dental services, Motor cars, Maintenance and repair of personal transport equipment, and Hairdressing salons and personal grooming establishment.”
Businesses will most likely increase the prices of their goods and services. Already, there are indications that the prices of bread, transportation, maintenance services and vehicle spare parts will increase further as the second quarter ushers in the rainy season. This is a time when the condition of Nigeria’s bad roads worsens and traders adjust their activities to remain in business. Whatever choice they adopt involves cost. This suggests that many transporters may park up their vehicles due to high maintenance cost and low returns.
From the annual reports of companies in the brewery, industrial and consumer goods sectors, 2020 was not particularly a good year as a result of COVID-19 in terms of restrictions and patronage, and the prolonged land border closure. They are not likely to bounce back to pre-COVID-19 positions soon because of the prevailing unfavourable macroeconomic environment. The raging inflation rate will deal a deadly blow on many of them resulting in cut in production, hike in prices of goods and services, rise in cost of operations and, possibly, through pay cut or lay off.
The signs that the Nigerian government would eventually end fuel subsidy in the second quarter of this year indicates that inflation rate could hit 20 percent or above. The proposed hike in electricity tariff will contribute its portion of the ‘3 Quarters of Pains’.
The multiple taxes which businesses are subjected to will further add to the worsening macroeconomic environment. Operators of MSMEs lament over official and unofficial taxes they are subjected to in the course of their operations. Most of the perpetrators are government officials who engage in the illegal activities to augment their pay as inflation eats into their income. They also operate with the consent of their superiors who are allowed to engage in such activities as compensation for their support to elected government officials.
Operators of courier and logistic firms facilitating e-commerce in Nigeria are being squeezed by multiple, unending layers of taxes from the federal, state and local government authorities across the country.
The President, Association of Nigeria Courier Operators (ANCO), Mr Okey Ubah, said “Local government papers are never enough. You cannot say at any time that you have got all the papers the local governments need to allow you operate your business as a courier and logistics operator. This is what a regulator should focus on – streamlining the tax requirements by the three tiers of government to provide a uniform tax system for the industry across the country.
“Courier is time-consciousness; it is a business that moves with time. The roadblocks and harassment by local government revenue officials affect our service delivery. Nigeria’s business environment is hostile. Many of our colleagues who invested hugely in infrastructure – imported equipment and machinery to transform the e-commerce sector, have closed shop because they cannot cope with the high operating cost”, Ubah had told THEWILL.
The rapid depreciation of Naira deepens the injuries of the business operators. In a bid to close the gap between official and parallel foreign exchange markets, the Central Bank of Nigeria (CBN) has embarked on gradual adjustment of the exchange rates. The Naira which exchanged N364/US$1 in March 2020, today exchanges N380/U$1. In March 2020, the parallel market rate was N465/US$1 as against N480/US$1 currently.
“We expect headline inflation to further increase going forward amid worsening insecurity which has spread to other peaceful regions, thus further disrupting economic activities, especially farming activities, supply chains and general output level. This, coupled with the long-standing structural challenges, may result in cost-driven inflation rate hitting 20% level in the near term”, say analysts at Cowry Asset Management Limited.
Inflation is the general rise in the prices of goods and services over time. The “inflation rate” is the rate at which the change in prices happens. This is usually expressed in percentages over time. For instance, if inflation goes up 10 percent than last year, it means purchases will cost 10 percent more than they did last year.
One basic fact about inflation is that it reduces the value or usefulness of money. That is to say, the higher the rate of inflation, the lower the value of the usefulness of your money, or your asset worth in real terms as time goes by. Inflation therefore means one’s purchasing power, how much a person’s money can buy.
Although, Nigeria exited recession in the fourth quarter of 2020 (Q4 ’20) earlier than anticipated, businesses remain challenged as they embrace negative fundamentals that increase operating expenses, cut profits, and shrink opportunities to expand. While the banks announce impressive returns in their 2020 annual reports, the other sectors are not so favoured.
About the Author
Sam Diala is a Bloomberg Certified Financial Journalist with over a decade of experience in reporting Business and Economy. He is Business Editor at THEWILL Newspaper, and believes that work, not wishes, creates wealth.
