• Wednesday, December 06, 2023
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Rising inflation puts telcos’ prices on back foot

Regulatory imperatives for sustaining revolution in the communications sector

While rising inflation has pushed up their operating costs, telecommunication companies have had to leave their prices unchanged or pare them down in a bid to retain customers amid shrinking purchasing power.

In July, Nigeria’s inflation rose to an eighteen-year high, jumping to 24.08 percent as a result of the removal of petrol subsidy and floating of the naira.

To reflect the weakening of the naira and the scarcity of foreign exchange, businesses in nearly every sector have adjusted prices of goods and services by very significant margins. Several experts project higher inflation rates than those from the National Bureau of Statistics. The telecommunication industry is arguably the only industry where prices of products and services are not just stable but they are reducing.

Karl Toriola, CEO of MTN Nigeria, said the price reduction was due to intense competition in the industry. “Normally, a price reduction would be a good thing because it attracts more consumer demand. But, as prices drop, the telcos’ cost of operation is surging, no thanks to the rising inflation.”

Inflation rose from 11.40 percent in 2019 to 18.85 percent at the end of 2022. It jumped above 24 percent in July. Also important to note that the exchange rate widely fluctuated from N306/$ in 2018 to N755/$ on the official window as of August 2023. On August 25, the dollar exchanged at N915/$ in the parallel market where most manufacturers source their foreign exchange supply due to scarcity in the financial institutions.

Read also: Telcos add 2m subscribers amidst declining broadband penetration

The naira devaluation was largely responsible for the foreign exchange loss of N131.4 billion MTN suffered in the second quarter of 2023 and dragging down its profits. According to the company’s half-year results, costs of operations, without accounting for taxation and finance expenses, jumped by nearly one quarter to N737.2 billion, due to Nigeria’s intractable inflation, which is forcing businesses to transfer costs to clients. MTN’s finance costs grew 161.8 percent to N237.6 billion on the back of a dramatic spike in net foreign exchange loss, which ballooned by more than nine times the figure for the same period of last year.

Airtel Africa also recorded a loss after tax of $151 million between April 1 and June 30, 2023, compared to a profit after tax of $178 million during the same period in 2022. The loss in the second quarter of 2023 was driven mainly by a foreign exchange loss of $471 recorded in the finance cost before tax and $317 million after tax because of the devaluation of the naira in June 2023.

While prices of other commodities from basic necessities to luxury items have risen, those of telecom services like airtime, data plans and SMS have remained stable or even dropped. An old study by Research ICT Africa, titled ‘1GB Basket statistics’, noted that Nigeria’s data prices have been declining steadily since 2014. In 2015, it dropped to $5.06 for 1GB and further down to $2.80 in 2017. As of 2022, the industry was still being celebrated as one of the few across 39 countries in the world with the lowest data price. The average cost for 1GB in Nigeria dropped to $0.71 (N327.10), which is lower compared to South Africa which is $2.04 (N939.93).

Maintaining telecom prices has many benefits, particularly on the consumer side, with the primary one being that it creates more access to connectivity for millions of people who are not yet covered. It encourages digitisation for the most vulnerable groups in the society. Bridging the digital gap in every community has become so critical that global institutions such as the Alliance for Affordable Internet recently revised its affordability targets from ‘1 to 2’ to the ‘Journey from 1 to 5’ to encourage governments across the world to set targets that say the cost of 5gB of broadband, both mobile and fixed, should not be more than 2 percent of the average monthly income by 2026.

In Nigeria, the Nigerian Communications Commission (NCC) reserves the right to set prices in the telecom industry. Operators say the regulator has been reluctant to use that power to adjust prices in a manner that reflects current realities.

“The current pricing regime of the industry is not sustainable,” said Gbenga Adebayo, president of the Association of Licensed Telecommunication Operators of Nigeria (ALTON). “We are basically selling below cost. It is not easy to talk about, but we cannot continue like this. We must allow market forces to continue to determine prices. On our end, we must look at a more realistic pricing regime that is not sustainable.”

Read also: NCC tasks telcos on network security, consumer safety

Market-led pricing has become a recurrent plea from operators to the regulator. A market-led- pricing is a pricing strategy that orients itself upon the current market conditions. There the seller sets the price higher or lower than their competitors depending on how well their own product matches up. A market-based pricing strategy is also known as a competition-based strategy.

For example, the recent deregulation of the petrol price and removal of subsidies which allowed the price of petrol to be determined by the market conditions. The same is the case for the liquefied natural gas and diesel markets which have also seen prices fluctuate because they are set not by regulators but by the market.

It is not a common practice in Africa as many regulators on the continent must approve prices before they are implemented in the market. But operators in the country say it holds merit, given that it encourages competition and ensures that services are being priced at a range that reflects the investment made in the infrastructure. BusinessDay’s questions to the NCC about its position on the market-led pricing strategy had not been responded to as of the time of filing this article.

The operators, through ALTON, have made several requests for the review of the service charges to the NCC all to no avail. Adebayo, while speaking at the second edition of the NCC’s Nigerian Telecommunications Indigenous Content Expo in Lagos, suggested that the NCC’s ability to function as a statutory entity was undermined by political interventions.

“We must not subject our regulator to political agendas. The biggest problems that we have today, that we are dealing with as an industry, are some simple policy issues that have been subjected to politics,” Adebayo said. “Let me speak for a bit about the issue of USSD debt. That was a simple commercial agreement that entered into political intervention and has led us to these points.”