Verraki: How Businesses Can Cope with Inflation in Nigeria
Chairman, Nigerian Economic Summit Group (NESG) and Managing Partner of Verraki Partners, Mr. Olaniyi Yusuf, is worried just like every other Nigerian about the rising prices of goods and services in Nigeria and has proffered some solutions, writes Emma Okonji
Inflation in Nigeria has increased unabatedly from 12.13 per cent in January 2020 to 24.08 per cent as of July 2023, which is 85 per cent increase in the Nigerian Composite Consumer Price Index from 310.2 points to 575.3 over the same period. In theory, inflation erodes purchasing power of consumers, creates economic uncertainties, impacts real return on investments, and induces wealth redistribution in favour of debtors. In Africa and other less developed countries, high inflationary trends have been linked to poverty, currency depreciation, social unrests, food crisis and many other negative outcomes. According to the National Bureau of Statistics (NBS), headline inflation rose by 24.08 per cent in July 2023 making it the highest rate in decades. World Bank also said high inflation pushed an additional four million Nigerians into poverty in the first five months of 2023.
Amidst soaring prices, Nigeria’s economic growth rate slowed to 2.51 per cent year-on-year (y/y) in Q2 2023 compared to 3.54 per cent in Q2 2022. The agricultural and industry sectors contributed less (23.0 per cent and 18.6 per cent) to the aggregate Gross Domestic Product (GDP) in Q2 2023 relative to Q2 2022 (23.2 per cent and 19.4 per cent respectively).
Disturbed by the inflation figures and the continuous rise in the prices of commodities, the Chairman, Nigerian Economic Summit Group (NESG) and Managing Partner of Verraki Partners, Mr. Olaniyi Yusuf, said the persistent rise in price of goods and services in Nigeria would continue to hurt consumers and businesses if immediate policy actions are not put in place to reverse the trend.
According to him, “Higher-than-expected inflation and slow growth may weaken the country’s macroeconomic fundamentals further, hence the need for urgent policy action to calm inflationary pressures and drive more inclusive growth.”
Drivers of Inflation
The NBS report suggested that food, electricity, housing, and transportation are the major drivers of inflation in Nigeria, but Yusuf is of the view that current inflationary pressures are equally driven by growth in money supply, insecurity, agriculture value chain disruptions, exchange rate depreciation, increase in energy prices, amongst other factors.
Addressing the issue of insecurity, Yusuf said the challenge of insecurity in many food-producing states in the country had significantly impacted food production and the entire agricultural value chain. He said whilst the menace of armed banditry, kidnapping and farmland destructions remained widespread; the northern Nigeria where the bulk of food production occurs has been significantly impacted. In addition to insecurity which has been an issue for over a decade, Yusuf said the currency swap policy of the Central Bank of Nigeria (CBN) in Q1 pushed many farmers to miss the opportunity to buy inputs and to plant, which is now leading to low harvests in Q3 and high prices.
He said between January 2022 and August 2023, the Naira had depreciated by over 90 per cent (to an all-time high of N784.9/US$) at the official (I&E) window. “Nigeria’s average monthly import bill is estimated at $2.8 billion, as the country remains largely import dependent for food, petrol, raw materials, and industrial equipment. Currency depreciation causes the prices of imported goods to become more expensive, thereby inducing inflationary pressures. According to the NBS, imported food inflation in Nigeria rose to a six-year high of 19.94 per cent in July 2023 largely due to the currency depreciation,” Yusuf said.
Another driver of inflation, Yusuf said, was in the area of high energy costs, insisting that energy prices are a major driver of inflation globally.
“The price of petrol in Nigeria has increased from an average of N176 in June 2022 to over N600 as of July 2023. Similarly, a 40 per cent increase in electricity tariff is likely to take effect in 2023, following the adjustment of electricity pricing model by the Nigerian Electricity Regulatory Commission (NERC). These events mount significant pressure on inflation in Nigeria, as the cost of manufacturing and distribution of goods and services becomes exorbitant. More recently, the government’s announcement of subsidy removal from petroleum products is bound to be inflationary, “Yusuf said.
Implications for Businesses
Speaking on the implications of rising prices on business in Nigeria, Yusuf said not all inflation is bad, but stressed that when price increase is out of control, it affects just about every area of a business, including the ability of managers to plan.
“In simple terms, inflation translates to higher utility costs, higher energy (diesel, petrol, etc.) cost, higher equipment cost, rent or lease increases, greater transportation costs, and lesser quality of life for the employees as their purchasing power reduces. It also does force customers to curtail their planned spending, which could imply loss of business opportunities. The recent inflation trend in Nigeria is clearly not healthy and hurts businesses, “Yusuf added.
He listed some of the ways inflation hurts businesses to include: Operating expenses; Cost of goods and services; Profit margins; Borrowing costs; Contractual agreements; Competitiveness and Supply chain disruptions. In the area of operating expenses, Yusuf said increase in the operating expenses had become inevitable.
“This is driven by the jump in energy costs (particularly diesel and petrol), rent and employee wages. Businesses would have to adjust their budget to accommodate these increases, “he said.
In the area of Cost of goods and services, he said businesses are experiencing an increase in the cost of raw materials and other inputs needed in the production process. Consequently, operating margins will come under intense pressure as it becomes more difficult to transfer these cost increases to the consumers through higher product prices.
In the area of Profit margins, he said profitability would come under intense pressure in 2023 as inflation causes costs to soar adding, “This is particularly true for small and medium-sized enterprises (SMEs) that might lack the negotiating power that larger corporations have.”
On borrowing costs, he said in May 2023, the CBN raised its benchmark lending rate by 500bps to 18.5 per cent in an aggressive push to contain the nation’s inflationary pressure.
This, he said, would imply higher borrowing costs for businesses, making it more expensive to finance operations, expansion, and investments.
Speaking on Labour market challenges, he said workers in the public and private sectors could experience a decline in their quality of life due to severe inflationary pressures.
“This has led to demands for higher wages from employees to maintain their purchasing power. Businesses that are unable to meet these demands could lose their key staff to competition, “he said.
He said businesses with long-term contracts could find themselves in challenging situations if the contracts do not account for inflation. “We will see some organisations move to renegotiate some contractual agreements if inflation persists, “he said.
He added that inflation could affect competition within sectors, as well as the ability of Nigerian businesses to compete in the international market adding that, “Businesses that could manage cost increases and maintain quality might gain a competitive edge over those that struggle to adapt.”
On business investments, he said inflation would elevate uncertainty, which impacts business investments. “Businesses might delay or cancel capital projects, expansions, and other growth initiatives due to concerns about the challenging economic environment, “he said.
He stated that supply chain disruptions would make suppliers struggle to meet with agreed supplies, “as prices rise, causing delays in the production process. Businesses may be forced to find alternative suppliers or adjust their sourcing strategies.”
Inflation Outlook
Yusuf said in foresight, Verraki would expect headline inflation to remain elevated in coming months as the combination of underwhelming food production, higher energy costs, lingering foreign currency liquidity and insecurity in major food-producing states, “will continue to mount pressure on consumer prices. Additionally, planting season in the second quarter is expected to keep food supply subdued, thereby triggering food inflation. Our model suggests that September inflation will settle at approximately 24.2 per cent, pushing the consumer price index to an all-time high of 586 index points.”
Solutions
Explaining what Nigerian businesses must do to remain resilient in the short and long-term, Yusuf said coping with persistent inflation could be challenging for businesses, especially when other headwinds in the operating environment limit the room for necessary adjustments.
Yusuf said adaptability and proactive measures remained crucial for businesses to maintain their resilience and continue to thrive in an inflationary environment.
“We expect inflation in Nigeria to peak in 2023, before a decline to below 20 per cent in 2024. In the interim, businesses must explore strategies that can help them mitigate its impact and maintain their operations and profitability, ”he said.
He listed some immediate short-term strategies that could help businesses to cope to include: Renegotiation of supply contracts; Reduction in consumption and waste; Reduction in discretionary and non-strategic spending; Changing the pricing model; Changing packaging to reduce cost; Product quality adjustment and Change in product line, among others.
In the area of renegotiating supply contracts, Yusuf said this would be a good time for Nigerian businesses to review supply contracts and renegotiate where possible to achieve some cost savings.
Such renegotiation, he said, must include clauses that benchmark future adjustments to inflation and other specific cost factors, “this will create room for businesses to protect profit margins in periods of volatile price movements.”
He said businesses would need to seek for innovative ways to produce/deliver more with less input, so as to keep operating margins healthy. This strategy, he added, entails tweaking input combinations to deliver same or more output using lesser resources, whilst eliminating all manner of waste and resource redundancies.
Speaking on discretionary and non-strategic spending, he said discretionary spending could be adjusted or eliminated without severely impacting the core functioning of the business.
“Cutting back on these types of expenses allows businesses to channel more resources to inputs that are critical to the survival of the business. It is important to note that while discretionary spending can be adjusted, it should still align with the company’s overall goals, financial health, and strategic priorities. Some examples of discretionary spending for most businesses include marketing and advertising, travel and entertainment, Research and Development (R&D), office renovations and upgrades, etc, ”he said.
Yusuf said businesses could implement dynamic pricing, which involves adjusting prices in real-time based on the marginal increases in the production cost.
He said optimising product packaging could lead to significant cost savings for businesses while still maintaining product quality and appeal.
With regard to product quality adjustment, he explained that one of the ways businesses could protect their market share during persistent inflation was to device innovative ways to keep their prices competitive.
This, he said, could be achieved by making strategic adjustments to product quality through innovative input combinations, product size reduction and reducing product features where applicable.
He suggested that changing or diversifying product lines could be a strategic approach to help cushion the effects of inflation for businesses. “A broader product line means that firm’s revenue is not solely reliant on one or a few products. This diversification can help mitigate the risks associated with market fluctuations or changing consumer preferences, which is the current reality due to rising cost of living, “he said.
Backward Integration
Yusuf is of the view that by integrating backward into the supply chain, businesses gain more control over input costs.
This control, he said, could help mitigate the impact of inflation on raw materials, “as the organisation becomes less reliant on external suppliers and market fluctuations. Multinationals in the Nigerian Fast Moving Consumer Goods (FMCG) space such as Nestle and Dangote have successfully implemented backward integration to maintain cost competitiveness.”
He advised businesses to invest in digital transformation and process automation at scale, adding that digital transformation and process automation streamline workflows, reduce manual interventions, and optimise operations. “This efficiency leads to cost savings, as fewer resources and time are required to complete tasks, which is especially valuable during inflation when costs are rising. Businesses can invest in Robotic Process Automation (RPA) or Business Process Management (BPM) systems to automate various routine tasks, improve efficiency, and reduce human error,” Yusuf said.
Spending Analytics Software
Yusuf advised on the implementation of spending analytics software, which could help businesses to analyse spending patterns, purchasing behaviour, and procurement activities to gain insights into how money is being spent.
“By examining spending data, companies can identify areas of inefficiency, uncover cost-saving opportunities, and make informed decisions to better manage costs. The tool will be particularly useful in a period of high inflation, he sexplained.
