Bad for business
Business activity in Nigeria declined for the second consecutive month as prices rose at the sharpest rates in six months due to…
Business activity in Nigeria declined for the second consecutive month as prices rose at the sharpest rates in six months due to inflationary pressure. Purchase prices rose rapidly amid currency weakness and higher fuel costs, logistics, materials and transportation. The Stanbic IBTC Bank’s Purchasing Managers Index (PMI) fell to 49.8 in September, down from 49.9 in August, indicating contraction. Despite some firms increasing wages to support workers, wage inflation eased to an 18-month low. Meanwhile, critics have rejected President Bola Tinubu’s claim that his administration attracted over $30 billion in Foreign Direct Investment (FDI) within 16 months.
Upon assuming office in May 2023, President Tinubu’s government initiated a series of reforms to pull the Nigerian economy from the brink of insolvency following years of mismanagement by previous administrations. The reforms, which included the naira devaluation and the reduction of petrol and power subsidies, were well received by economists but negatively impacted the ordinary Nigerian’s living standard. Many quickly adjusted to the new reality despite the challenges. However, it has become worrisome for most stakeholders and ordinary Nigerians that the promised benefits of the reforms have yet to materialise, and new reform initiatives are being introduced, prolonging the process. Consumer spending has declined because incomes have not risen commensurately with the naira devaluation and inflation has remained elevated despite interest rate hikes. High inflation affects businesses in multiple ways. First is the decline in consumers’ purchasing power, meaning demand drops drastically and the incentive to produce more is removed. Secondly, the replacement costs of stocks become too high to be viable in a low-purchasing power environment, reducing what can be produced. Lastly, as the CBN continues to raise interest rates to tackle inflation, credit becomes even more expensive, removing that financing option for businesses. Many investors also reroute their funds to risk-free government securities with high yields in the heightened interest rate environment, further constricting the financing options. It is, therefore, unsurprising that the PMI and Foreign Direct Investment (FDI) continue to decline, particularly as the National Bureau of Statistics (NBS)’ reports about $30 million in FDI, contradicting the president’s claim of attracting $30 billion in investment. This suggests that investors are getting more uncertain than they were a year ago.