Nigerian firms face fresh cost-of-doing-business crisis
Companies in Africa’s biggest economy are facing a cost-of-doing-business crisis as the soaring costs of diesel and transportation have made it increasingly difficult for them to operate.
Fuel prices have soared since Russia invaded Ukraine in February, raising costs for firms in Nigeria, where many businesses rely on diesel-powered generators for power amid unstable grid electricity.
The price of Automotive Gas Oil, popularly known as diesel, has soared by almost 178 percent to N800 per litre from N288 in January, forcing some firms to restructure their production hours, while others completely shut down operations.
BusinessDay interviewed a dozen of small businesses, and nearly two-thirds of the operators believe there is a possibility they will be out of business within a year if nothing is done to support them. The surging operating costs of firms in Nigeria show no signs of abating.
Segun Ajayi-Kadir, director general of the Manufacturers Association of Nigeria (MAN), recently urged the government to intervene to prevent many businesses from collapsing amid multiple challenges.
“It is therefore imperative that manufacturing be given priority and safe guarded against steep deadlines,” he said in a July statement.
He said this should be backed with a comprehensive and integrated support system during times of crisis. “Should manufacturing companies that are already battered with multiple taxes, poor access to foreign exchange and now over 200 percent increase in price of diesel be advised to shut down operations?” he asked.
“The surge in diesel prices is really alarming and tiring. There is hardly any power supply where my business operates; so we rely on diesel most of the time,” said Omowumi Afolashade, the head baker at The SweetTreat Paradise.
“We now spend a lot on diesel, and the impact is seen on our bottom line. If the surge continues, I do not think the business will survive it,” she said.
From agro-processors to brewers to banks and pharmaceuticals companies, operating costs have more than doubled this year. According to MAN, energy cost accounts for 40 percent of factories operating cost.
“The surge in diesel prices is squeezing our operations. We were forced to recently shut down our factory because of the challenge,” Akin Laoye, executive director at FTN Cocoa, said in a phone response to questions.
“The challenges for the industry continue to increase daily, making it difficult for us operators. How can we survive with diesel at N800 per litre?” he asked.
BusinessDay analysis of the half-year financial statements of five fast-moving consumer goods companies listed on the Nigerian Exchange Limited, including Unilever Nigeria Plc, Nestle Nigeria Plc, Cadbury Nigeria Plc, NASCON Allied Industries Plc and Dangote Sugar Refinery Plc, showed that the amount spent by the companies on transportation rose to N43.19 billion in 2022, up from N33.79 billion, indicating a 27 percent increase.
Akinloye Ayorinde, a financial analyst, said the high transport and logistics cost is due to the surge in diesel prices.
“The Russian-Ukrainian situation, the crude oil market, and the high cost of diesel are all contributing to the high prices that transport companies are charging the FMCG companies and those that distribute their products themselves,” he said.
Some manufacturers power their factories with gas, but gas prices are also surging due to the war. There are no official price rates for natural gas in Nigeria, but in the global market, natural gas sells for $8.76/MMBtu, according to data from Bloomberg.
“Nigerian factories that run on gas pay for it with dollars. FX is scarce currently in the country; so apart from contending with the surging gas prices they still need to source for the dollars to make purchases,” said Joseph Okojie, a geophysicist in Lagos.
The Lagos Chamber of Commerce and Industry (LCCI) said on Tuesday that the economy had continued to struggle with many inhibiting burdens like inflation, weak revenue generation, degenerated infrastructure, forex challenges, and unsustainable cost profile.
“The chamber is concerned that if we continue in this trajectory, the economy may bleed away into a stagflation which will impact on production cost, job losses, worsened forex crisis, and dampened growth in the medium term,” Chinyere Almona, director-general of LCCI, said.
Since the COVID-19 pandemic, Nigeria, which depends largely on crude oil proceeds, has been hammered by weak foreign inflows, resulting in a liquidity challenge in the country’s FX market.
Earlier in the year, the Russia-Ukraine crisis worsened the country’s FX challenges. As of Tuesday, September 9, the naira-dollar exchange rate closed at N426.28/$1 at the official market and N695/$1 at the parallel market.