Telecoms FDI grows to 7-year high despite hurdles

Foreign Direct Investment (FDI) in Nigeria’s telecom sector surged by 537.26 percent to a seven-year high of $304.99 million in the first half of 2024. However, industry experts have said this growth is insufficient to close the sector’s investment gaps or return it to profitability.

According to the National Bureau of Statistics, telecom investments reached a seven-year high after plummeting to $98.37 million in H1 2018 from $319.96 million in H1 2017. Despite this, the sector has struggled with new economic challenges, particularly after the Central Bank of Nigeria (CBN) unified the foreign exchange market in 2023.

The naira has tumbled from N471/$ before the move to N1043.09/$ by December 28, 2023, and N1603.16 by October 21, 2024.

This led to losses in the sector, with Airtel Africa and MTN Nigeria losing N1.29 trillion in foreign exchange (FX) losses. In 2023, MTN posted its first loss since its 2019 listing on the Nigerian stock exchange, N137 billion, and declared a loss after tax of N519.1 billion for H1 2024.

This downturn has led to reduced investment in the telecom space as operators grapple with mounting financial pressures. Telcos have cut back on capital expenditure due to an inability to adjust to market realities. Bolaji Balogun, CEO of Chapel Hill Denham, emphasised that telcos must invest $1 billion annually to improve service quality requirements.

Carl Cruz, managing director and chief executive officer of Airtel Networks Limited (Nigeria), recently noted that increased operating expenses are outpacing revenue growth, making investors wary of committing funds to a sector struggling to adjust to macroeconomic headwinds.

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Gbenga Adebayo, the Association of Licensed Telecommunications Operators of Nigeria, recently highlighted the importance of foreign investments for maintaining service quality and sustaining communication services.

“Our business is mainly dependent on foreign exchange,” said Modupe Kadri, chief financial officer of MTNN. “So, customers need to understand that it costs money to receive the services they desire. Record losses and foreign exchange volatility are slowly making a once darling sector of the Nigerian economy unattractive for enough investments.

Recently, Karl Toriola, chief executive officer of MTN Nigeria, said, “Investments will not continue to come. No one will put in a dollar and continue to get 66 cents… We are in a big crisis.”

The lack of fresh investments threatens to degrade network quality in the country. Also, economic headwinds, exacerbated by double-digit inflation, 32.70 percent in September 2024, have raised the cost of inputs in this investment-heavy sector.

Airtel and MTN have indicated plans to reduce capital expenditures. Over the last two years, MTN has spent N1.08 trillion on capex, and Airtel Nigeria has spent $545 million in the same period.

MTN said, “In this regard, we plan to reduce capex (excluding leases) for FY 2024 and aim for a capex intensity in the upper single digits.”

Airtel Africa added, “Having considered all the above-mentioned factors impacting the Group’s businesses, the impact of downside sensitivities, and the mitigating actions available to the group including a reduction and deferral of capital expenditure…”

To adjust to these, telcos are pushing for a tariff review, arguing that it will encourage investments and return them to profitability.

“For ten years now, telecommunication companies haven’t been permitted to increase prices, and this regulation is not providing us with a level playing field to operate. If we are to stay in business, this policy must be reviewed, similar to how electricity and fuel prices are adjusted to reflect current economic realities,” Kadri of MTNN added.

However, the government has argued that tariff hikes are not the only way out because of their expected impact on Nigerians. Bosun Tijani, minister of communication, innovation, and digital economy, recently stated, “There are tons of other things that we must do to ensure that the business environment is conducive for the investors in this space. And the government is active, including in the tariff conversation.”