By Charles Abuede
- High inflation
- Naira depreciation
- High interest rates
- Poor demand
- Poor power supply
- A very volatile business environment
As the Nigerian economy grapples with the stack reality occasioned by the covid-19 pandemic, rising inflation rate and the depreciation of the local currency on the back of pressure from increasing demand for the dollar, Nigerian businesses are lamenting the intensity at which insufficient power supply, stifling competition, unfavourable economic climate, high-interest rate, unclear economic laws, funding challenges, unfavourable political climate, poor access to credit and insufficient demand have combined to constrain business activities in Africa’s biggest economy and the earth’s most populous black nation.
Nigerian businesses have buckled under the pressure brought about by these challenges and what seems to many of them an intransigent situation defying the managers of the country’s economy notwithstanding the global economic situation brought by the pandemic.
The result of a business expectation survey conducted by Nigeria’s monetary authorities, the Central Bank of Nigeria (CBN), and administered on thousands of Nigerian businesses shows businesses expressing serious pessimism on the macro economy, although with a rather positive outlook on the volume of total order, the volume of business activity, average capacity utilization and financial condition (working capital).
This pessimism on the macro-economy reflects and, indeed, complements the arguments in a report by audit and financial advisory firm, KPMG on the complexity of the business environment which is intricately interwoven by forces that defy the traditional cause and effect analysis, such as multiple taxations, VAT increase, increase in electricity tariff, and increase in fuel price, among others.
The KPMG report notes that the Nigerian business environment is creating a scenario which is volatile as a result of nature, speed, volume and magnitude of change which is not predictable; thus, causing consistent turbulent and market fluctuations.
It describes a Nigeria business environment which owes its volatility to the lack of predictability in issues and events which makes it difficult to see future outcomes or make decisions.
Such an uncertainty “limits decision-making capabilities such as trade restrictions and border closure,” for businesses, the report stated.
Nigerian businesses are daily finding they have to grapple with difficult headwinds, and deal with an environment that KPMG report says is characterized by factors such as revised global gross domestic product (GDP) growth rate to -4.4 per cent for the global economy and -4.3 per cent for Nigeria, from 3.3 per cent and 2.5 per cent respectively as of January 2020; the issue of forex scarcity as a result of high demand and multiple exchange rates; lingering security uncertainties or concerns especially in the area of banditry and government response to the #ENDSARS aftermath; border closure and or selective treatment of some politically exposed and influential individuals and political pressure of increased prices, which has led to strikes and protests across the country.
Nigerian businesses’ expectations on the local currency as well as the rising rate of headline inflation are worrying. Inflation reached its peak for the first time in over 30 months, and it is widely thought to have begun to find comfort in the economy with a spiralling effect on the purchasing power of Nigerians, as well as strong levels of pressure mounted on the naira in the foreign exchange markets, amidst border closures and a rising exchange rate.
Businesses believe that the Nigerian currency will depreciate further in the current month but appreciate in the next month, next 2 months and next 6 months, suggesting an improved confidence level towards the exchange rate.
The apex bank’s survey also revealed that businesses believe that that lending rate would rise in the current month, next month, next 2 months and the next 6 months as part of other identified constraints to the business environment in Nigeria.
Similarly, there is high anticipation for an increase in economic conditions as the index on economic growth rate in the short run portends optimism in the level of economic activity. On the flip side, firms expressed dissatisfaction with the management of inflation by the government with a negative net satisfaction index of -25.1 in the month under review.
Meanwhile, firms’ outlook on the volume of business activities point toward a favourable business outlook for December 2020 and January 2021 with positive indices respectively. Also, businesses hope to employ in December 2020 and January 2021 as the outlook was positive. The break down by sector showed that the wholesale/retail trade sector has the highest prospect for employment in the next month, followed by agriculture/services sector, construction and manufacturing sector.
Furthermore, respondents were also optimistic about the volume of business activity and employment outlook index in the next 6 months as all indexes were pointed northward. A cursory analysis of businesses with growth plans in December showed that the wholesale and retail sector has the highest disposition to expand and is followed by the manufacturing sector, agriculture/services sector, construction sectors.
Strategies for businesses, Nigeria to navigate through new normal
KPMG highlights seven major responses to navigating the new normal which can be applied by the economy as well as businesses in Nigeria.
Safeguarding people and customers: First and foremost, businesses should understand the complex landscape of customers, borrowers and shareholders and manage stakeholder communications, to stay ahead of the issues and make the best decisions.
Supply chain management: Conduct a value chain assessment of other risk factors that may escalate costs and impact service and inventory capabilities, proactively address shortages. Undertake comprehensive end-to-end supply chain management and improve the ability to model and predict consumer behaviour, especially in times of uncertainty and disruption.
Countercyclical financial management: Cash is King -Set up robust short term cash flow (STCF) forecasts at the business unit and company level, reviewing weekly against prior forecast and outturn. Explore options to improve liquidity and cash flow; especially across foreign-denominated spending e.g. going into Forex Forward Contracts to protect against further impact on currency adjustment.
Robust funding strategy and FX management: Prioritise investment liquidity to ensure flexibility of asset base and purchase securities at low prices for long term funding. Hedge FX exposure to mitigate the adverse effects of possible FX shocks; Utilize derivative instruments like forward contracts as hedging tools.
Proactive cost management: Address both the cyclical and structural costs elements and cash requirements of the business, including questioning organization design and challenging business operating models. Demand more accountability from line managers
Strategic risk management: Assess the adequacy of internal controls under the new working arrangements while intensifying security awareness amongst staff and customers via email, text messages and other mediums, providing tips on the safe use of your digital channels. Develop detailed business continuity and infrastructure scalability frameworks including processes for monitoring infrastructure load and performance
Strategic agility: Invest in digitalisation and functionalisation, reduce personnel costs and increase efficiency. Leverage available digital platforms (social media, payment platform solutions, website, etc.) to engage customers to reinforce messaging that their security solutions service provider has the capacity to weather the shock