• Thursday, March 28, 2024
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BusinessDay

Nigerians groan as high diesel price stokes inflation

Tax on diesel imports seen piling pressure on firms

The impact of higher energy costs is expected to reflect stronger in Nigeria’s inflation figures when the National Bureau of Statistics publishes data for March but for Nigerians the pain has lasted longer.

The rise in the price of diesel following the global energy crisis sparked by Russia’s invasion of Ukraine has had a devastating impact on businesses in Nigeria, from manufacturing giants to medium-sized enterprises and small-scale organisations.

From gigantic diesel generating plants that turn the industrial machines in Nigeria, to the trucks used for long-distance haulage of both industrial and finished goods, to small machines used by small-scale enterprises, diesel has a stronghold on Africa’s largest economy.

Bonchudi Ndigwe, managing director of Continental Waste Managers Limited, explained to BusinessDay how the unprecedented hike in diesel prices has been negatively impacting his business operations in the last two months.

“For our business, which is about 80 percent transportation with diesel engine trucks, it is clear that this unprecedented diesel price increase is a major blow to our operations.

“Firstly, the prevailing business environment and downturn in the economy did not allow us to make any increase in our tariffs since the consumers/clients are currently finding it difficult to pay the existing rates, not to talk of an increase occasioned by the jump in diesel price.”

Ndigwe said, “Secondly, the present diesel price is negatively impacting on frequency and efficiency of service to tenements, since our compactor trucks could only move after they have been fuelled, and this is directly related to payment receipts from serviced clients which are dwindling by the day.

“And considering that waste management business in Lagos state is rigidly regulated and tariffs to tenements controlled and roundly discussed with stakeholders, it becomes almost impossible to suddenly increase the rate because of the jump in diesel price.

“Therefore, we are solely bearing the brunt for the increase in diesel price and clearly experiencing reduced receivables and difficulties in providing services to our esteemed clients.”

Diesel prices, which are deregulated in Nigeria, have jumped from about N288 per litre in January to over N780 by the end of March/early April.

A staff member of the Abuja Urban Mass Transit, who opted to be anonymous, told BusinessDay that the current crisis had caused transport fare to increase from N100 to N250, from Bwari to Wuse route.

According to him, payment of salaries is inconsistent because the organisation is struggling to stay afloat amid the high diesel cost.

“This is a huge challenge for the lower/struggling class as the urban mass transit is largely patronised by masses who cannot afford high taxi rates. The hike in prices is defeating the purpose of the transport system,” he said.

This crisis has forced businesses to begin rationing supplies, cutting down work hours and wasting productive working hours either monitoring diesel consumption or totally clamping down on consumption.

Stephen Nejo, a Lagos-based banker, noted that some banks had cut down the number of operating hours.

“The cost of running diesel has really increased. When you look at the cost and the income is not increasing, the best you can do is to reduce your expenditure by reducing the number of hours you run in serving customers,” he said.

The impact of the price hike has been worsened by the drop in electricity supply in the country on the back of the collapse of the national grid.

Imu Ismaila, a petty trader who deals in frozen fish and chicken, said she had lost nearly N100,000 since the power failure that had lasted for several weeks and had refused to improve.

She said the cost of preserving her goods had increased due to the high diesel cost, forcing her to increase the price of her wares.

Ismaila, who resides in the Lokogoma area of Abuja, said: “In the first week when this problem started more than 30 pieces of my fish decayed; this business requires constant electricity, and because of that shortage, everyday some of my fish must decay.

“I am managing the situation by increasing prices; else I will keep running on huge losses every day. My customers are complaining but that’s the only way; though the increase is not much, Nigerians will still complain.”

Wole Akeju, executive director at RedBox Deluxe Café, said out of all his three businesses, his lounge and drink businesses had been hit the most.

He said: “The cold room, used to store the drinks, run on diesel because everything has to be chilled. We are really struggling because we cannot pass that cost to our customers because they will complain, making us lose them to our competitors.

“At some point, we bought diesel as high as N750-N800 per litre. Although, it has come down a bit now but it has not changed anything. Until it goes back to N400 per litre, then maybe things will be OK.”

Transferred cost

Moses Ojo, a Lagos-based economic analyst, told BusinessDay that the prices of bread and sachet water rose significantly in the first quarter of the year.

“In my view, businesses are already transferring increase in input costs to final consumers due to pressures on their margins. Recently, we have seen an increase in the prices of loaves of bread, sachet water and other consumables,” Ojo said.

According to him, the ability of businesses, especially consumer goods firms, to transfer the increase in input costs to the final consumer is being hampered by the weak consumer spending and other macroeconomic factors that are not favourable to the consumers.

“However, there is a limit to the ability of businesses to absorb increased costs,” he added.

Muda Yusuf, chief executive officer at Centre for the Promotion of Private Enterprise, said the degree of the competition in a market would determine whether to increase prices or not.

“It depends on the degree of competition in the market. If it is a highly competitive market, it will be very difficult for producers or retailers to transfer the increase to consumers for fear of losing them. So, when you are faced with elastic demand it is not easy to increase prices,” he said.

Read also: Private schools struggle amid rising diesel price

Damilola Adewale, a Lagos-based economic analyst, said: “It depends on the industry. For inelastic products, players will find it easy to transfer additional cost to consumers.

“For elastic products like food stuff and consumables, the situation puts them in a dilemma. Absorb costs and see your bottom line drop; transfer cost and lose market share. I feel industry dynamics will shape decisions.”

Ibrahim Tajudeen, head of research at Chapel Hill Denham, indicated that threat to profits would be a major trigger that would stimulate transfer of cost to the consumers.

“They will pass it when the pressure on their profitability is too much for them to bear because there will be a tolerance level for them in that regard and at that point, they will be willing to pull the trigger in terms of price increase to consumers,” he said.

David Arinze, a businessman at Bannex, a shopping mall in Abuja, said he had made up his mind on getting solar system for his business.

“Installing a solar system is very expensive, but it is a more sustainable solution. However, the loan to purchase it is going to be very costly and that cost might have to be channelled to my customers unfortunately,” he said.

Experts differ on MPC’s next action

Last month, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria signalled a possible hike in the benchmark interest rate in the second quarter.

“The current surge in energy prices has placed significant levels of pressure on businesses to acquire loans,” Tajudeen said.

“The likelihood of increasing interest rates is high and the reason is that 40 percent of the MPC committee at the previous meeting voted for a rate increase. So, in the next meeting, if 60 percent of them vote for a rate increase, it might be as high as 50 basis points,” he added.

According to Ojo, the surge in energy prices is a one-off event that was caused by the disruption in supply chain by the war between Russia and Ukraine and the decision to boycott Russian crude oil by some countries.

He said: “The situation is expected to normalise soon; however countries like the United States have taken actions to ameliorate the crisis by releasing a significant quantity of crude oil to the world market daily.

“Therefore, I do not think the situation will have an impact on the decision of the Monetary Policy Committee of the Central Bank of Nigeria (CBN) in their next meeting,” he added.

Yusuf is of the view that the MPC would not increase the rate because the key drivers of inflation are not monetary issues.

“Nigeria’s inflation is cost-driven. And if the monetary policy rate is increased, it can only create more challenges for businesses because the cost of borrowing will go up which will mean more problems, worsening the pains of those using diesel,” he said.

Adewale said the MPC’s decision at the next meeting would be largely dependent on Q1 2022 GDP figure, which would be released before the end of April.

He said, “At the last meeting of the MPC, one of the key considerations was the impact of the higher energy prices on consumer prices. Something interesting also happened: four out of 10 members voted for a hike compared to the unanimous decision in January.

“For the May meeting, the outcome of the Q1-2022 and inflation trajectory as well as expectations would shape policy decisions. I think if GDP growth comes out suboptimal, I see the MPC holding rates (though some members will opt for a hike) to ensure growth is supported while adopting its usual administrative measures to regulate liquidity.

“The truth is because Inflation is driven by structural factors, CBN won’t be willing to hike interest rates because it poses a threat to their development interventions.”

Adewale said: “Diesel has been deregulated for a long time now. Marketers are left to source for dollars, which they buy from the black market. You know the rate at which dollars are sold in the black market.

“Against these odds, I am hopeful that the pump price of diesel will eventually go down in a few weeks and subsequent anticipated inflationary pressures would hopefully be tamed. The market will definitely adjust itself,” he added.