Spiraling Inflation Crushes Over 400 Lagos Micro Enterprises, Stoke Capital Flight
Over 400 micro-enterprises in Lagos have closed shops owing to spiraling inflation that has stoked a sharp increase in the cost of raw materials, and induced capital flights from Nigeria’s economy.
Micro enterprises are a category of Small and Medium Enterprises (SMEs) with fewer than or a maximum of 10 employees.
Although the details of the sectoral groups to which the affected micro-enterprises belong are sketchy, this development implies that about 4,000 have been thrown out of jobs, thereby fueling the unemployment rate in the country, a situation that will further sink Nigeria into the poverty net.
Nigeria’s employment rate in 2022 was 33 per cent while the number of Nigeria living in poverty rose by 35 million in 2022, to 133 million people, indicating 63 per cent of the country’s population according to the 2022 Multidimensional Poverty Index released by the National Bureau of Statistics (NBS) last November.
SMEs play a strategic role, being the economy’s growth engine, accounting for about 80 per cent of employees in Nigeria.
“We have 500 members but less than 100 now attend our monthly forum, signifying that all is not well with them”, says the National Chairman of Lagos-based Association of Micro Enterprises of Nigeria (AMEN), Saviour Ichie, who noted that more than two-thirds of his members have since gone out of production.
Ichie, who manufactures fast moving authentic range of consumer products narrated how the government’s border closure last year, alleged festering corruption in the Bank of Industry (BOI), sharp increases in the cost of raw materials, unprecedented rise in diesel cost, and weak sales, turned manufacturing into a death trap for entrepreneurs.
“High mortality of micro, small and medium enterprises in Nigeria is the reason we have a very high unemployment rate today. We are the highest employer of labour in this country because our sector of the economy absorbs millions of unskilled labour that other sectors cannot engage. Yet the government and its agencies don’t factor us in their policies”.
“The government closure of the border affected the majority of our members, and those who managed to survive it are now grappling with the grave impact of inflation at decades’ high. Before the government closed the borders, most of those coming into Nigeria through the borders from neighbouring countries are our customers. Nigeria used to be their business hub where they get everything they wanted.
“When the government eventually banned goods coming in and going out of the country from the borders, the customers that used to come and buy from us settled back in their countries and developed alternative products. Some of our countrymen relocated to their countries and started manufacturing there. They weren’t coming again. By the time government reopened the borders, it was too late. The damage had been done. Now, some of our members have been pushed out of businesses, and into unexpected poverty”, Ichie lamented.
Spiraling inflation hitting 21.47 per cent in November, the highest in about 17 years, is gradually grinding small and medium-scale enterprises (SMEs) to summary death and stoking capital flight never seen in more than 10 years, according to findings by InsideBusinessNG
Worse of all, the surge in the inflation rate which has triggered an unprecedented cost of living crisis in Nigeria is pushing more households into multi-dimensional poverty. And this is about to hit a tipping point given sharp increases in prices before the yuletide and the rapidly rising transportation cost following fuel price hikes across the country.
Unfortunately, the Central Bank of Nigeria (CBN) with its anti-inflation campaign won’t help matters having promised to keep hiking rates as inflation continues to spiral with the hope of crushing the scourge, an approach critics of the apex bank describe as “using fire to fight the fire.”
Now, experts express fears that the fast accelerating inflation-threatening returns on investment will likely push foreign portfolio investors out of Nigeria’s emerging market to more stable, foreign currency-denominated assets, citing as bait, the latest hike in interest rates in the UK and the US, investment destinations which they consider as safe haven with predictable returns.
Inflation Data in November
The National Bureau of Statistics (NBS) published its monthly inflation report on Thursday, December 15 showing that the cost of living in Nigeria maintained a rapid rise for the tenth consecutive month, increasing by 38 basis points in November to 21.47 percent year-on-year, up from 21.09 percent in October.
On a month-on-month basis, headline inflation increased by 15 basis points to 1.39 percent up from 1.24 percent month-on-month in October, data published by Nigeria’s statistics office showed.
The rate at which prices increased in November was 17 basis points faster than forecast by Bloomberg’s median consensus estimate of 21.30 percent year-on-year and 10 basis points higher than the 21.37 percent estimate by Lagos-based Cordros.
According to NBS, the increases in the cost of living were driven by sharp increases in the cost of food (food inflation) which rose by 40 basis points to 24.13 percent year-on-year, up from 23.72 percent in October year-on-year.
SMEs in Throes of Inflation Demon
Reviewing the implication of the spiraling cost of living in Nigeria, former Director General of the Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf, told InsideBusiness that the environment is no longer safe for Small and Medium Scale Enterprises (SMEs).
The Director of the Centre for Promotion of Private Enterprise (CPPE) projected that at least 70 percent of SMEs that are in production of commodities have been summarily crushed, while the remaining 30 percent that is into trading or provision of services are groveling in the throes of inflation demon, trying to remain in business steadily shrinking cash flow.
“So, the situation is that the business environment is no longer safe for SMEs, certainly not. It is even worse for those who are in production. But those into buying and selling can manage to get buyers. What they have going for them is cash flow, not that they are making much profit. Their margins have been massively eroded. Some of them are even selling at a loss. It is as bad as that. As to the number of those who have closed shop, not less than 70 percent of SMEs in production must have closed down. Those who are into trading and services are still managing to keep cash flow,” said Yusuf quoting industry direct contact sources.
According to the industry expert, as hostile as the environment is, even if SMEs are given huge credit, they will still be crushed by unfavourable government policies and negatively tilted structural issues, thus putting them into a credit mess and more problems.
Hear him: “SMEs’ problem is not only funding. The closure of the border, look at how it has affected them. If you give any of them funds that time, you just put them into more trouble because how could they have repaid? There is no SME that can produce successfully with the level of cost of diesel now unless the SME does not use electricity very much. But if they continuously use energy, there is no way they can survive. But the bigger issue with micro-enterprises is the problem of government policies, for instance, the closure of the border, and the problem of foreign exchange. It is affecting their production”.
“Due to foreign exchange scarcity, some of them cannot even buy raw materials because they can’t have access to forex. The big companies are having problems, not to talk of small companies. Not many SMEs can survive a season of high inflation because if they manage to buy things at high prices, how will they be able to sell them to their customers?
“Because of that, many of them have gone under. So, the issue now is not funding because if they are given funds and they go and buy foreign exchange at over N700 per dollar, or buy diesel at over N600 per litre, who are they going to sell the product to? How are they going to repay the money? How will the business survive?”, Yussuf wondered.
Foreign Portfolio Investors Now Looking Homewards
Ayodeji Ebo of Afrinvest West Africa Limited told InsideBusiness that not only does inflationary pressure portend grave danger for the SMEs but also harder times for quoted companies and commercial banks because it also triggers capital flight, especially as yields are trending higher in the two leading developed economies following interest rates hike in the two leading United Kingdom and the United States of America.
He said: “From companies’ perspective businesses will have challenges issuing more commercial papers (that is debt instruments) but from investors’ perspective it is a good one for them with higher returns. This is the best time to invest in fixed-income assets because rising inflation means higher interest rates on fixed-income instruments,” the investment expert says.
He added, however, “hike in interest rates in UK and US could lead to a massive outflow of portfolio investments because of elevated country risks associated with 2023 general elections. Already, Nigeria has been grappling with multi-layer security issues. All these are critical factors driving inflation,” Ebo told our correspondent over the telephone.
For quoted companies, he said inflation would imply higher borrowing costs which are going to affect their margins, stressing that commercial lenders would also be affected since borrowers are likely to withdraw from further borrowing due to the high cost of credit.
On the general economy, he said a higher interest rate means more difficult times because it will certainly lead to a higher cost of production. “As the cost of production rises, manufacturers pass on the cost to consumers, and this cycle will continue to lead to further acceleration in inflation. It may snowball into a vicious cycle,” the investment expert stated.
Also reviewing the NBS inflation report, Jerry Igwilo, a credit and investment management expert highlighted the grave implication for the economy and credit management.
According to him, continued increase of interest rates in the US and UK may accelerate capital flight from Nigeria, a situation where foreign investors sell off their portfolio investments in various assets classes and move to safe haven environment where yield in bonds and treasury bills are safer and dollar value quite stable.
“Once that begins to happen, it will also affect Nigeria’s local currency in terms of value. For a country that is highly dependent on the importation of most of the things that we use, it also means that the prices of those goods and services will be higher. This implies that whatever we import, we are importing inflation into our economy. So it becomes a vicious cycle that might be difficult to manage,” says Igwilo who worked as Chief Finance Officer (CFO) with Lagos-based Heyden Oil Limited.
Inflation and Credit Management
On the impact on credit management, Igwilo, an investment banker said that commercial lenders are going to review interest charges on outstanding loan contracts once the Central Bank increases interest rates again in response to a further rise in inflation figures, and the cycle continues.
“The customer who borrowed money will have to pay more when the interest rate goes up. Basically, you are paying more in interest on the same amount of loan because the cost of borrowing has gone up.
“As the cost of borrowing goes up, it means that businesses that might borrow to run production may not do so. This will impact negatively on investments in productive capital and a decline in the gross domestic product (GDP),”, Igwilo said.
It would be recalled that InsideBusiness reported that risk-averse foreign portfolio investors sold down their investment portfolio in the Nigerian equities market to a paltry N350 billion in October, according to data obtained from the Nigerian Exchange.
The highlight of portfolio investors’ transactions showed a sharp decline from N1.22 trillion reported in 2018 to N435 billion in 2021, dropping further down to N350 billion end of October, representing a year-on-year decline of around 48 percent, the lowest in about decade.
Foreign portfolio investors accounted for a mere 17 percent of Nigerian equities market transactions in October while domestic investors accounted for the bulk of transactions amounting to N1.73 trillion or 83 percent of total equity trades in the month under review.
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