Telecom sector loses steam on mounting losses, slowing investments

Telecommunications sector growth and contribution to Nigeria’s gross domestic product (GDP) have slowed in recent years, driven by record losses and weakened financial performance among operators.

Real GDP growth in the telecom sector declined from 11.71 percent in the first quarter (Q1) of 2023 to 5.17 percent in the second quarter (Q2) of 2024. Nominal growth fell from 52.83 percent in Q1 2023 to 5.63 percent in Q2 2024.

GDP growth in the sector declined from 24.80 percent in Q2 2020 to 12.28 percent in the corresponding period of 2024.

“Telecoms growth and contribution to overall growth is now shrinking. This trend started in Q3, 2023,” said Abdulazeez Kuranga, regional economist, West Africa at Standard Bank Group.

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Nigeria’s GDP grew by 3.19 percent (year-on-year) in real terms in Q2 2024, higher than the 2.51 percent recorded in Q2 2023 and 2.98 percent in Q1 2024. This growth was mainly driven by the services sector, which expanded by 3.79 percent and contributed 58.76 percent to the aggregate GDP.

The total real GDP was N18.48 trillion in Q2 2024, up from N17.94 trillion in Q2 2023 and N18.49 trillion in Q1 2024.

Telecoms is a crucial pillar of Nigeria’s economy. The sector was instrumental in pulling Nigeria out of recession in Q4 2020, and according to the Global System for Mobile Communications (GSMA), the mobile telecoms sector accounted for 13.5 percent of the total GDP in 2023.

However, recent setbacks have triggered a prolonged downturn. Karl Toriola, chief executive officer of MTN Nigeria, recently described the situation as a ‘big crisis.’

Airtel Africa and MTN Nigeria, the only telecom operators listed on the Nigerian stock exchange, reported N1.29 trillion in foreign exchange (FX) losses in 2023. MTN posted its first loss since its 2019 listing, amounting to N137 billion. It further declared a loss after tax of N519.1 billion for H1 2024.

Although Airtel reported a profit after tax of $31 million in the quarter ended 30 June 2024, it noted that it was impacted by the $80 million of exceptional derivative and foreign exchange losses.

“The entire ecosystem is battling with a range of challenges that must be addressed,” said Gbenga Adebayo, chairman of the Association of Licensed Telecommunications Operators of Nigeria (ALTON).

These challenges include: soaring diesel prices, escalating input costs due to the naira’s depreciation, and rising inflation, which reached 33.40 percent in July 2024.

“At the heart of the challenge the industry faces is the issue of rising costs,” Adebayo emphasised.

“The telecoms sector is struggling at the moment. Foreign exchange-related issues have dampened sentiments, and most players are very unlikely to grow capital expenditure. NIN-SIM link verification exercise has added another layer of pressure,” tweeted Olaolu Boboye, lead economist and fixed-income strategist with CardinalStone Partners.

Kuranga of Standard Bank Group noted, “Had the telecom sector been growing the way it was pre–Q3 of 23, overall growth (GDP) would have been at least 4.2 percent in Q2, 24.”

Operators have already indicated that investments in the sector will decline, further dampening the GDP growth. GSMA recently warned that falling revenues would “result in a shrinking sector which leads to subscribers receiving a poorer quality of service and delays in coverage expansion.”

It further said that in the short term, the situation could result in a reduction in the amount of tax revenue generated by the sector.

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Adebayo of ALTON argued that failing to mitigate these challenges will continue to impact the sector’s GDP contribution.

“This is a critical moment for the industry. How we approach and resolve it will define the future of Nigeria’s digital economy,” he stated.

He highlighted that the Ministry of Communications’ plan to increase the sector’s contribution by 15 percent between 2023 and 2027 is now under threat.

In response to the sector’s GDP performance, Bosun Tijani, minister of Communications, Innovation and Digital Economy, recently established a committee to review operational conditions and propose fiscal measures to cushion the impact of macroeconomic pressures on telecom operators.

“As a major contributor to our country’s GDP, the telecommunications industry is critical to the development of our nation as it helps to spur innovation and promote digital inclusion among Nigerians,” he said.