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Is Nigeria’s economy becoming uninvestable?

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President Bola Tinubu, on his assumption of office, told expectant Nigerians that he would “remodel our economy to bring about growth and development through job creation, food security and an end of extreme poverty.” He also promised to tackle the age-long power challenge, engineer a low interest rate financial system and reform the perennially inefficient public sector in order to drive a private sector-led economy that would create massive jobs and end an unemployment crisis that had hit 33.3 per cent.

Instead of delivering these lofty promises, Tinubu’s one year in office has caused the once largest economy in Africa to gradually drift into an uninvestable enclave. First, the economy, which has maintained its leadership position in Africa for over a decade, slipped to the fourth position in less than 12 months under Tinubu’s watch.  The output has continued to tank in real terms as hard policies prevent fresh investments from entering the market while existing ones pull out in search of safer havens.

The collapse, exit, and entry of corporate entities are surely part of the dynamics of every economy. That is even more common in more advanced capitalist economies. However, an economy is considered functional when the entrants exceed the number of firms that exist in terms of absolute value. Sadly, Nigeria has seen one-way traffic in this trend in recent years, and, worse off, the speed of exit has been even faster in the past year.

Exit of a 74-year-old ‘tenant’

Last week, Diageo dumped its 58 per cent controlling share in the 74-year-old Guinness Nigeria Plc on the Singapore-headquartered consumer group Tolaram.  For those who have taken more than a passing interest in the brewer, the exit was a misfortune foretold. The transaction came shortly after it announced an N81 billion ($55 million) foreign exchange loss in the first quarter of the year.

Last year, the company’s net foreign exchange loss jumped to N46 billion from N223 million recorded in 2022. The loss pushed up its net liability to N183.7 billion, according to its financials, while its net asset stood at N141.8 billion. The shortfall in its asset base would have outstretched its working capital and created a hole in Diageo’s global balance sheet, contributing to Diageo’s decision to offload shareholding in the Nigerian operation. But Diageo is not alone in the struggle to survive Nigeria’s daunting business environment. Its competitor, Nigerian Breweries Plc, posted a net foreign exchange loss of N85.3 billion and N7.3 billion last year and 2022 respectively, leading to an all-time high loss last year with net liabilities of over N500 billion.

Growing number of multinationals exiting Nigeria

While Guinness will manage to carry on with its operations in Nigeria, albeit under a new owner, some other companies might not be as fortunate. Shortly before Diageo and Tolaram signed a deal on equity transfer, Kimberly-Clark announced its exit from the Nigerian market on account of the rising cost of operation after 15 years of operation.

“Kimberly-Clark will close its manufacturing facility and commercial office in Lagos and will no longer manufacture, market, or sell its Huggies and Kotex products in the country,” the company posted on its website.

Barely two years after it opened, Microsoft has reportedly concluded a plan to close its Africa Development Centre, which oversees its push for high-end engineering and innovation solutions. Last December, Unilever Nigeria PLC, a company that is synonymous with corporate Nigeria, shut down its 100-year-old home care and skin cleansing categories and converted its factory to a rental facility. Procter & Gamble (P&G), similarly, shut down production in the country, saying it could not sustain its “dollar-denominated” operations. Like P&G, GlaxoSmithKline (GSK) Consumer Nigeria PLC was among dozens of multinationals that closed production last year and transitioned to a leaner third-party distribution business model for its essential pharmaceutical products.

 

In the same year, several small businesses reportedly shut down operations as they struggled to cover operating costs. For instance, the Nigerian Association of Small-Scale Industrialists (NASSI) said 30 per cent of its members closed operations in the year alone.

Tougher days are here

Long before Tinubu assumed office, hundreds of businesses operating in Nigeria were on what, in local parlance, is termed ‘siddon dey look’. Harsh policies, rising terrorism, worsening public power performance, high inflation, foreign exchange crisis, exodus of experts and steep fall in purchasing power were enough to close most of the businesses, but many hung on in hopes of better government policies by a new government, as the country approached the 2023 general election.

Sadly, the country is riskier to invest in than at any other time in its history, with uncertainty rising sharply, mostly driven by a steep fall of naira. Since 29 May 2024 when the current administration assumed office, the naira has lost as much as 69 per cent of its value to the dollar, falling from N460/$ to N1480/$, according to trading statistics. When the monetary authority activated the International Monetary Fund (IMF)-inspired market reform, it promised Nigerians that the local currency would achieve stability in a matter of months. But a year into the record, the naira-term value of naira is unpredictable, and the official market is inaccessible to companies for input and machinery importation.

The market awaits the “low-interest rate” regime President Tinubu promised a year ago. The new Central Bank of Nigeria (CBN) policy, which has raised the anchor interest from 18.5 per cent to the current 26.25 per cent, suggests that we may not return to the pre-Tinubu interest rate anytime soon. The high interest rates are straining hard business operators, who are, unfortunately, finding it difficult to pass the entire cost to already hard-pressed consumers.

Real albatross of corporate survival  

The real nemesis of corporate survival in Nigeria is not the foreign exchange crisis or the unaffordable cost of borrowing.  Diesel, a major source of energy for Nigerian businesses, has soared by 500 per cent in the past two years – from N200 to N1200 per litre – on account of naira depreciation and rising global energy prices.  Tinubu promised to increase power efficiency to end private sourcing, especially for manufacturers.

However, the plan remains in the pipeline, with national power distribution still capped at around 3,000 megawatts (MWs), while the generation deficit is estimated at 15,938MWs. The Manufacturers Association of Nigeria (MAN) said inefficient power was partly responsible for the closure of over 300 companies and the loss of 380,000 jobs in April and May of 2024.

Most businesses have resorted to self-help, with companies operating in the manufacturing sectors alone spending N458.12 billion ($310 million in current exchange value) in sourcing alternative energy between 2018 and 2022. With diesel prices increasing by over 500 per cent since early 2022, the spending has increased geometrically, a challenge that has sent many businesses out of the country.

Certainly, fixing the comatose power sector is the task in any plan to reverse the current corporate failure and make the country investable.

 

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