Telecommunication and other information and communication companies significantly increased their borrowing from local banks in 2023, driven by a challenging economic climate and a devalued naira that made foreign loans expensive.
According to data from the Central Bank of Nigeria’s Deposit Money Banks’ Sectoral Distribution of Credit, these companies increased their loans by 207.12 percent to N768.54 billion as against the N250.24 billion they did in 2022, increasing their overall credit to banks by 63.56 percent to N1.98 trillion by the end of 2023.
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Overall, private sector credit surged from N15.09 trillion in 2023 to N44.54 trillion. According to the National Bureau of Statistics, the information and communication sector comprises the activities of telecommunications and information services, publishing, motion pictures, sound recording and music production, and broadcasting.
Of all the four sub-sectors, the telecoms segment was responsible for 84.68 percent of the sector’s GDP contributions, underscoring its significant share. This rise in local borrowing coincides with a 70.5 percent decline in foreign investment in the telecom sector, which fell from $456.83 million in 2022 to $134.75 million in 2023.
This decline in foreign investment and rise in local borrowing also occurred in the year that MTN and Airtel declared losses following the naira devaluation.
Many of these companies increased their appetite for local borrowing amid the naira’s vast depreciation. In 2023, the naira lost over 40 percent of its value following the removal of the rate cap on the naira in the foreign exchange market.
As foreign loans became more expensive, telcos’ local borrowings surged from N1.38 trillion as of April 2023 to N1.74 trillion by July 2023. Telcos’ reliance on loans has also been tied to the industry’s slowing financial performance.
Airtel recorded a loss of $89 million for its year ended March 2024, and MTN Nigeria’s loss was N137 billion for the year ended 2023. Both telcos blamed the naira devaluation, rising inflation, and worsening macroeconomic conditions in the country.
MTN (in its first quarter report for 2024) noted that it had begun reducing its exposure to dollar volatility. Aside from increasing their appetite for local loans, telcos, like MTN, also grew their thirst for commercial papers from N22.44 billion to N234.11 billion in the year.
In its 2023 financial report, MTN highlighted that its net finance costs increased by 58.1 percent to N211.1 billion due to higher borrowing costs and interest rates, excluding its net forex loss.
According to experts, telcos need to borrow regardless of economic performance because of the nature of their business.
Tony Emoekpere, the president of the Association of Telecommunications Companies of Nigeria (ATCON), explained that telcos “do not just borrow for growth, but also because of the nature of the business. There is always something to improve on with technology.”
This became more pronounced with the naira’s devaluation. Emoekpere opined that foreign exchange fluctuations fuelled the appetite for these new borrowings.
“It is a good thing that they are borrowing from banks. It is good for the economy. But there is a need to borrow at single digits, though,” he said. He emphasised that the direction bodes well for the operators who already earn in naira and are trying to reduce their exposure to foreign exchange fluctuations.
He, however, clamoured for lower interest rates for telcos. The Lagos Chamber of Commerce and Industry (LCCI) recently expressed concerns about the impact of high interest rates on businesses that need to borrow.
“The high lending rates make it challenging for businesses to access credit, especially for SMEs that are the backbone of the economy,” LCCI said.
GSMA, the global industry body for telcos, highlighted that the industry’s overall financial performance in recent years needs to be improved to support the capital-intensive nature of the business.
“Revenue in naira has stopped growing as the number of subscribers has increased. Falls in ARPUs indicate pressure on prices and reductions in average usage,” the industry body said in an industry report on Nigeria.
Despite this increase in local loans, GSMA believes that mobile service providers must still be able to generate sufficient revenue to cover their operating costs and support their level of capex over the medium term.
“If this is not realised, they are likely to cut back on either capital or operating expenditure or both. This results in a shrinking sector which leads to subscribers receiving a poorer quality of service and delays in coverage expansion,” it stressed.
