Business owners groan as operation costs skyrocket

An increasing number of Nigerian businesses are feeling the strain of the increasing costs of production, largely due to the removal of subsidies on petrol and diesel. As a result, the costs of petrol and diesel continue to climb, causing production expenses to surge. This unpleasant situation has become a cause of worry for some operators that their businesses might fold up if the government fails to intervene urgently.

President Bola Tinubu on the assumption of office on May 29, 2023, announced the removal of subsidy on petrol. Nigeria is highly dependent on both petrol and diesel because of its lack of stable electricity.

Access to electricity in the country is the lowest globally, with about 92 million Nigerians lacking access to power, the Energy Progress Report 2022 released by Tracking SDG 7 recently revealed.

The World Bank has also disclosed that businesses in Nigeria lose about $29bn annually because of the country’s unreliable access to electricity.

Many households and businesses in the country depend on petrol- and diesel-powered engines to keep their lights on and production running and any shift in the cost of either product negatively impacts the economy.

However, since the subsidy was removed, petrol prices have risen by 210.31 per cent year-on-year in June 2023 (a month after the removal of the subsidy) to N545.83 according to the National Bureau of Statistics. The price of diesel also rose by 11.18 per cent y-o-y to N815.83 per litre in June.

This increase in fuel prices (particularly petrol) in combination with persistently high inflation is expected to impoverish more Nigerians, weaken disposable income, and crash the demand for many products.

The World Bank recently stated that Nigeria has one of the highest inflation rates, and this pushed about four million people into poverty between January and May 2023.

The Bank also said 7.1 million Nigerians would become poor if the Federal Government fails to compensate or provide palliatives for them, following the removal of fuel subsidies. This prediction is expected to push the number of poor people in the country to 100.9 million.

“The poor and economically insecure households will face an equivalent income loss of N5,700 per month, and without compensation, an additional 7.1 million people will be pushed into poverty.”

With more Nigerians falling into poverty, experts believe businesses will struggle with turnover to mitigate against their own rising cost of production.

The Abuja Chamber of Commerce and Industry recently said many Small and Medium-sized Enterprises in Nigeria are already shutting down.

A printer who identified himself as Mr Akin, who owns a printing press at Shomolu, lamented the high operating cost of printing due to the current pump price of diesel and the volume he must buy daily to meet up with the printing jobs of his customers. He explained that he could not solely rely on the electricity supplied by the Disco to run his business as it is unreliable.

Akin further stressed that prices of almost everything have gone up even down to the sheets of paper and other printing materials.

He could only hope that President Bola Tinubu addresses the issue of the hike in petrol because it has affected his profit deeply.

A barber who identified himself as Kola Adebayo, who owns a barbing saloon located in Okota, said the high cost of petrol is affecting the running of his barbing saloon.

To reduce the burden of fuel on his business, Adebayo opted for the option of gas, as he had to convert his generator from petrol to gas.

“So far that decision has been cost-effective as gas lasts longer than petrol. I now spend less compared to the purchase of petrol at the current rate daily.”

A baker who owns a pastry outfit, who simply identified herself as Mrs Folashade in Ajao Estate, said the cost of operation is increasing daily and it is affecting my baking business.

She stressed that the cost of a bag of flour has increased due to the depreciation of the naira against the dollar, “and you cannot even predict what the market price will be by the next time you go to the market.”

Folashade hopes that things will come back to normal soon as the cost of running the generator and maintaining her machines and equipment is killing her.

She complained that patronage has reduced due to the present economic realities Nigerians are experiencing. Like Adebayo, Folashade is also considering the option of converting her generator from fuel to gas to cut costs.

The National President of the Association of Senior Staff of Banks, Insurance and Financial Institutions, Comrade Oluwole Olusoji, in an interview said, the answer lies in the government announcing its plan to restructure the system.

“By now we expect the government to have announced a road map to such reforms and set clear timelines. A lot has been said about the savings from the removal of subsidies. Those savings can be immediately channelled into providing subsidised services that will add value to the lives of every Nigerian,” according to him.

The reform, according to Olusoji, should cover areas like public transportation, health, and support to the agricultural sector. “Organisations may also need to fashion ways to reduce the expenses of their staff.”

“If we survived the COVID-19 lockdown through remote work, it simply means it is achievable and will have a positive impact on both the employer and employee.”

In the same vein, the Chief Executive Officer, Centre for the Promotion of Private Enterprise, Muda Yusuf, said, “The government has been talking about palliatives but the kind of palliatives the government is talking about has not addressed concerns of business.”

“The approach must be policy-driven, looking at our tax policy for instance, let the government give tax rebates to businesses in the light of what is happening now so that business owners can have some ease.”

Before now, SMEs have a threshold of N25m turnover, below which they are not going to pay any tax as regards company tax or VAT. It can be moved to N35m so that any SME whose turnover is within that range and below should be exempted from tax.”

He suggested that for the next six months, the government should peg the price of petroleum products.

“Government should allow businesses and even the citizens to have some breathing space. Government should work out an arrangement where it will allow the current prices to subsist at least for the next six months."

“This is because energy products are not something that you can throw entirely to market forces because of their impact on the welfare of the people, productivity, transportation etc. especially PMS,” he added.

“As it is, the citizens cannot afford any further increase; the government should work out the citizens.”

He stressed that there was no point in generating so much revenue and the citizens were in agony, it didn’t add up. The whole essence of government is about the people.

Yusuf stated that there were some monetary policy initiatives that the CBN brought up during the COVID-19 pandemic, there are so many initiatives for SMEs, especially liberal financing, let the government provide that to businesses to ease the pressures that businesses are experiencing now. So, from a monetary policy perspective, we can also enjoy some palliatives.

He called on the government to reduce importation tariffs for manufacturers, so that their production costs could come down.

Also speaking, an Associate Professor of Economics at Pan Atlantic University, Dr Olalekan Aworinde, said, that the removal of subsidy from the oil price, of course, is a good policy measure taken by the Federal Government to reduce some wastages, noting that subsidy in itself is a scam.

“Once the subsidy is removed the implication is that the price of the petroleum product would go up and because oil itself is a product that has a multiplier effect on other products in Nigeria, the possibility is that it is going to affect SMEs and other firms negatively.”

Meanwhile, he suggested that what the government could do to cushion the effect of the present harsh realities of the economy on SMEs is to create an enabling environment, especially in terms of infrastructure.

“Majority of the SMEs in Nigeria are high-cost producers, they provide electricity for themselves and when all these things are added to the cost of production, it’s going to increase,” He added.

Aworinde noted that the expectation here is that the government should try as much as possible to create a conducive environment and ensure that electricity is provided.

“If there is a constant supply of power, the implication is that the cost of production would reduce drastically,” he argued.

He emphasised that the government must ensure ease of doing business in Nigeria as it would also cushion the effect of the high cost of operations for SMEs.

He warned that failure on the part of the government to intervene would lead to the closure of businesses and job loss in the economy.