• Wednesday, June 12, 2024
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BusinessDay

Firms brace for lower profits amid high energy costs

How can Nigeria navigate economic turbulence and achieve stability?

Several Nigerian businesses are bracing for lower-than-expected first-quarter profits over rising energy costs in Africa’s biggest economy.

A BusinessDay survey of some Chief Financial Officers (CFO) of leading Nigerian companies revealed that the over two-fold jump in diesel prices and worsening public power supply had increased operating costs and is expected to impact profit in the first three months of the year.

“The impact of higher energy costs is something we expect to impact our first quarter-profit significantly,” the CFO of a leading manufacturing company told BusinessDay. Nigerian manufacturers have already warned this month of job cuts and price increases over the diesel price surge.

Power accounts for as much as 40 percent of factories’ costs in Nigeria, according to the Manufacturers Association of Nigeria.

“When your cost of production increases and you are unable to pass it to customers out of fear of lower sales because you have to consider the weak purchasing power in the country, then your bottom-line suffers,” said the CFO of another company who was pricing in a 25 percent hit on the Q1 profit of his firm.

The CFO of a local bank also bemoaned the rising diesel price, which he described as a “double whammy” combined with the worsening power situation.

“Nigeria would not be reeling so much from high diesel prices if there were reliable power supply, which speaks to the failure of the government,” the person said.

From a January average of N288 per litre, the price of diesel has more than doubled to N700 in Nigeria, causing widespread anxiety for businesses that rely on the product to power generators that make up for historically unstable power supply. Unlike petrol, the government does not subsidise diesel imports, with the price changes mirroring the Russia-Ukraine war.

Meanwhile, the national power grid collapsed twice in three days last week, causing blackouts.

Rising energy costs are also affecting companies in other climes.

This month, for instance, factories in the UK were forced to halt some production, with energy prices doubling to as high as 300 pounds ($396) a megawatt-hour. The whole of Europe is pretty much mired in an energy crisis that has left business owners terrified for the future.

Nigerian firms are only just finding their feet after the bruising impact of the COVID-19 pandemic.

The surge in diesel costs, which is a fallout of Russia’s invasion of Ukraine, looks set to present a fresh hurdle to long-suffering Nigerian firms.

Read also: Nigerian Manufacturers warn of job cuts over diesel price surge

The stocks of listed Nigerian companies fell for the fourth straight day Tuesday, with the All-Share Index down by 20 basis points, according to data from the Nigerian Exchange Limited.

FG’s corporate tax revenue at risk

Lower-than-expected profits could trigger not only job cuts in a country with the second-highest unemployment rate in the world, it also threatens the Federal Government’s projected revenue.

The government expects to earn nearly a trillion naira (N909 billion) from corporate taxes this year, but may end up with less if company profits decline.

That would leave an even bigger hole in a budget that already has a deficit of N6.39 trillion and is projected to hit N10 trillion as a controversial subsidy bill takes toll.

If the government’s revenue fails to add up, it may then have to borrow more to finance its spending.

The space for more debt is however narrowing for Nigeria, which spent 76 percent of its revenues servicing debt in 2021.

Last week, the Debt Management Office published its quarterly data series that showed that Nigeria’s public debt rose 20 percent to N39.6 trillion in 2021, equivalent to 22.7 percent of GDP.

Nigeria’s debt to GDP compares favourably with debt ratios of peers such as Kenya, South Africa, and Ghana, which are 69 percent, 82 percent, and 86 percent, respectively, according to the International Monetary Fund.

However, the country’s debt profile is weakened by insufficient revenue collection, resulting in an abnormally high debt service-to-revenue ratio.

The Federal Government’s retained revenue to GDP was less than five percent of GDP on an annualised basis in the 11 months to November 2021, while the debt-service to revenue ratio was 76 percent.

“Given the projected borrowings of N5.1trillion (ex-supplementary budget) this year, the debt service-to-revenue ratio may well surpass 2021 levels,” Tunde Abidoye and Abiola Gbemisola, analysts at Lagos-based FBN Quest, said in a March 21 note to clients.