Companies in Africa’s largest economy are facing a cost-of-doing crisis as skyrocketing prices for diesel and transport services make it harder 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 generators for power amid an erratic power grid.
The price of motor kerosene, popularly known as diesel, has soared by almost 178 percent to N800 per liter from N288 in January, forcing some firms to restructure their working hours and others to stop operations altogether.
BusinessDay surveyed a dozen small businesses and nearly two-thirds of operators believe there is a chance they will go out of business within a year if nothing is done to support them. The rise in operating costs of firms in Nigeria shows no sign of abating.
Segun Ajayi-Kadir, the Director General of the Manufacturers Association of Nigeria (MAN), recently called on the government to intervene to prevent many businesses from collapsing amid the many challenges.
“Therefore, it is critical that production is prioritized and protected from the harsh deadlines,” he said in a July statement.
This should be supported by a comprehensive and integrated crisis support system, he said. “Should manufacturing companies, already suffering from multiple taxes, poor access to foreign exchange and now more than 200 percent increase in diesel prices, be advised to shut down?” he asked.
“The rise in diesel prices is really alarming and tiring. Where my business operates, there is virtually no electricity; so we rely on diesel most of the time,” said Omowumi Afolashade, head baker at The SweetTreat Paradise.
“Now we spend a lot on diesel and it shows in our results. If the surge continues, I don’t think the business will be able to sustain it,” she said.
From agribusinesses to brewers to banks and pharmaceutical companies, operating costs have more than doubled this year. According to MAN, the cost of energy accounts for 40 percent of the operating costs of factories.
“The rise in diesel prices is squeezing our operations. We were forced to close our factory recently due to the call,” said Akin Laoye, executive director of FTN Cocoa, when answering questions over the phone.
“The challenges for the industry continue to grow daily, making it more difficult for us operators. How can we survive with diesel at N800 per litre?” he asked.
BusinessDay’s analysis of the half-yearly financial statements of five 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, revealed that the amount spent by transportation companies, grew to 43.19 billion news items in 2022 from 33.79 billion news items, indicating a 27 percent increase.
Akinloye Ayorinde, a financial analyst, said the high transport and logistics costs were due to the surge in diesel prices.
“The Russian-Ukrainian situation, the crude oil market and the high cost of diesel fuel all contribute to the high prices that transport companies charge FMCG companies and independent distributors,” he said.
Some manufacturers supply their factories with gas, but gas prices are also rising because of the war. There are no official prices for natural gas in Nigeria, but natural gas is selling at $8.76 per million baht on the global market, according to Bloomberg data.
“Nigerian factories that run on gas pay for it in dollars. Currently, there is little currency in the country; so apart from struggling with rising gas prices, they still need to look for dollars to make purchases,” said Joseph Okodi, a Lagos-based geophysicist.
The Lagos Chamber of Commerce and Industry (LCCI) on Tuesday said the economy continues to grapple with many headwinds such as inflation, weak revenue generation, degraded infrastructure, forex challenges and volatile expenditure profile.
“The chamber is concerned that if we continue on this trajectory, the economy could slip into stagflation, which will affect production costs, job losses, exacerbate the currency crisis and slow growth in the medium term,” Chinieri Almona, CEO. LCCI, said.
In the wake of the COVID-19 pandemic, Nigeria, which is heavily dependent on crude oil revenues, has faced weak foreign inflows, leading to a liquidity problem in the country’s foreign exchange market.
Earlier this year, the Russian-Ukrainian crisis worsened the country’s currency problems. As at Tuesday, September 9, the naira-dollar exchange rate closed at 426.28 naira to 1 dollar in the official market and 695 naira to 1 dollar in the parallel market.