PwC Forecasts Lower Revenue, Higher Operation Costs for Nigerian Businesses Due to Subsidy and FX Reforms

PricewaterhouseCoopers Nigeria (PWC) has projected increased challenges for Nigerian businesses due to recent fuel subsidy and forex reforms by the government.

In its 2023 economic report dubbed ‘Nigeria Economic Outlook’, analysts at the multinational financial firm said businesses should brace up for higher costs of operation and lower revenue as the impact of fuel subsidy removal and floating of the forex market takes a toll on consumer spending.

“Consumer spending may be adversely impacted by the elevated inflation rate (food 25.3% and core inflation 20.3% rates) and fuel price (140% increase after subsidy removal), the report said.

“Business revenues may decline in the short-term mainly due to direct impact input costs and reduction in disposable incomes.

“Rise in energy, food, transportation, and import costs may dampen consumer spending on non-discretionary items.”

The firm highlighted areas where the increase is expected, driven by the jump in FX rates as well as rising transportation costs.

Naira floating is expected to drive up the cost of imported raw materials. The naira value since the implementation of the policy has ranged between N472-N771/$ from an average of N463/$ in May before the policy announcement, it said.

PwC further noted that the general rise in prices due to the removal of [fuel] subsidy may have a trickledown effect on the various SG&A expenses such as marketing, logistics, utilities, etc.

Also, given the increase in the MPR rate to 18.5% in July 2023 by 25 basis points, the cost of borrowing naira is expected to remain elevated.

“Finance costs [are] to increase due to exchange rate losses from higher interest payments incurred on exposure to foreign currency denominated loans,” the report said. “These losses are on account of the currency devaluation.”

PwC noted that although the increases may have a negative impact, they could provide incentives to corporates to explore local sourcing or backward integration in the medium term.

The report said that economic reforms, including FX market liberalization, have the potential to attract foreign investments and drive capital inflows in the long term.

However, in the short run, investors may take a cautious “wait-and-see” stance, possibly due to the lack of additional reforms aimed at bolstering business and economic fundamentals.

Furthermore, the report predicts that an increase in inflation could lead to a reduction in real yields or returns on investments.

Conclusively, PwC said to achieve growth, organizations need to do these three basic things: Optimize customer growth proposition, Review cost across the value chain, secure talent, and improve ways of working.

Optimizing customer growth proposition:
To achieve customer growth optimization, corporate organizations should implement the following strategies: adjust pricing and pack architecture using Revenue Growth Management (RGM) analysis to cater to shifting consumer habits, adapt products to accommodate changing demand dynamics by substituting expensive raw materials, leverage post-event analytics for promotion decision-making, renegotiate contracts for better terms, and expand distribution through discounters and online platforms to align with evolving consumer buying patterns

Reviewing cost across the value chain:
To optimize costs across value chains, companies should conduct thorough analyses across the value chain. For overhead costs, they should examine benefits versus pay and consider greater segmentation of rewards, implement a hiring freeze, and improve the visibility of non-payroll expenses.

Streamlining organization design to eliminate duplication and reprioritizing non-core work are also crucial. In brand marketing, a marketing audit should be conducted to enhance cost transparency, and marketing campaigns with high ROI should be prioritized while managing supply issues by reducing promotion frequency without compromising depth.

Lastly, in total supply chains, identifying alternative sourcing locations to minimize risk and cost, aligning procurement across business divisions, and optimizing spending through global and local deals are essential actions.

Securing talent and improving ways of working:
To secure the key talent required to win, CEOs need to explore the following strategies: 

i.) Realign their Employer Value Proposition with emerging realities.
Answer the question: why should key talent want to work with your organization?

 ii.) Explore alternative resourcing models and ways of work. What legacy policies need to change in response to the needs of the new ways of working (hybrid, cross-border talent, etc)? 

iii) Review recognition and reward programmes to compensate for differentiated capabilities and performance 

iv.) Deploy enterprise-wide upskilling to build the capabilities required for the new world of work (digital, data, green skills, etc).