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Nigeria’s GDP growth under threat as rising inflation eats into company profits

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Latest results released by companies listed on the Nigerian Stock Exchange reveal rising cost of goods and services is eating into profits at levels not seen since 2017.

A cursory review of some of the first-quarter results published by some of Nigeria’s largest companies reveals higher input and operational cost on a year-on-year basis. This is despite price adjustments made across board by most consumer goods companies.

A drop in revenues and profits is often a bellwether for a country’s economic growth and as more results show contraction across industries, it is stoking fears of a possible economic contraction in the coming months.

Latest report from the National Bureau of Statistics states Nigeria’s inflation rate at 15.92% up from 15.7% reported in February. The rise in operating cost of some of the companies we reviewed revealed dips in gross margins negatively impacting profitability growth.

Specifically, Nigerian companies spent a huge sum on power in the first quarter of 2022 as cost of energy surged significantly across most countries in the world. Notably, cost of diesel sold as high as N850 per litre in some areas of the country, while some firms had to cut down on working hours in order to manage costs.

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This also extended to the cost of transportation as it coincided with the period when adulterated petrol was discovered in the country, which led to scarcity of petroleum products across the country. The high cost of operating expenses could cause a slowdown in economic activities, as companies could be forced to draw down on some of their activities in order to manage its finances.

What are company results saying?

MTN one of Nigeria’s largest companies and most profitable listed companies, saw its direct network operating cost increase from N92.3 billion in the first 3 months of 2021 compared to N10.2 billion as a percentage of revenue, the gross margin is 23.9% and 22.7% respectively.

Nairametrics observed similar cost increases across most of the listed companies. Whilst price increases have helped cushion rising cost for some of the companies, Nairametrics anticipates a further dip in profits in the short to medium term if global inflationary trends persist.

What manufacturers are saying

Last month, the Manufacturers Association of Nigeria (MAN) warned that the high costs of diesel used by their members could lead to a high cost of goods and services due to the high cost of production.

Upshots

The potential implication for Nigeria when businesses experience cost inflation could lead to a contraction in a country’s growth rates.

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