Why exactly are major international firms leaving the Nigerian market?
Nigeria's myriad problems have decades-old origins, but the Tinubu administration bears responsibility for poor rollout of reforms
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I: Rushing for the exits
Last week Diageo, a UK-based alcoholic beverage giant, announced its planned divestment from Guinness Nigeria. The operation was sold for a mere $70m to Toloram, a Singapore-based firm with deep political connections in Abuja, and a controlling interest in the Lekki Deep Sea Port, as well as joint ventures with several producers of consumer products (e.g. Kellanova/Kellogg, Indomie, Huggies, Colgate-Palmolive and others). According to Bloomberg, in March Guinea Nigeria reported “a loss after tax of 61.65 billion naira compared with a 5.87 billion naira profit a year earlier.” Diageo will lease the Guinness brand to Toloram and will continue operating its premium spirits business in Nigeria.
Diageo’s partial exit from the Nigerian market raises an important question: if a beer maker cannot make money in Nigeria, who can?
Other major global firms that recently scaled down their operations or exited the Nigerian market include Shoprite Ltd., Tiger Brands Ltd., Woolworths Holdings Ltd., Microsoft, Bayer AG, Bolt Food, Unilever Plc, Procter & Gamble Co., GSK Plc, Kimberly-Clark Corporation, and Sanofi SA. Several global oil majors already exited Nigeria’s onshore operations due to insecurity (and criminal environmental pollution and corruption). While staying, the likes of Nestle, Cadbury Nigeria Plc, PZ Cussons Plc are struggling and have issued profit warnings.
Despite a small bounce in 2021-2022, FDI into Nigeria remains well below recent peaks. The 2023 total was $3.9b, down from $5.3b in 2022.
While much of the reporting so far has mainly focused on large multinationals whose exits impact middle class workers, Nigerian firms — especially SMEs — are also feeling the pain. More than 767 firms closed down in the first quarter of 2023 alone. Many more are “dying quietly” under the weight of rising operational costs and rapidly dwindling consumer purchasing power:
“It’s news because it’s P&G. It’s news because it’s GSK. It’s news because they have been in the country for a long time — but there are others that have died quietly,” Segun Ajayi-Kadir, director general of The Manufacturers Association of Nigeria advocacy group said on local television after the P&G announcement. “If the current situation doesn’t improve, certainly we’ll have more closures.”
SMEs in Nigeria comprise more than 96% of firms, contribute close to half of GDP, and absorb nearly 80% of the working age population in largely informal jobs. It goes without saying that as SMEs go so will Nigeria’s “real” economy. As I keep arguing here, there is an urgent need to put a lot more money and effort into policy and entrepreneurial innovations to help existing firms in low-income countries grow and become more productive.
II: What is driving the exits?
The multinational exits are caused by a variety of factors, not all of which are necessarily negative for the Nigerian economy. I will discuss each in turn.
1) Many of the departing multinationals have been losing market share and can’t compete against lower-cost rivals:
The business model for most multinationals in Nigeria has been to maximize profits, limit tax liabilities, and repatriate as much of earnings as possible. That model doesn’t incentivize investments in local resilience and often takes customers for granted. The idea that international brands alone will carry the day with consumers is perversive — and in some cases has led to multinationals cutting corners and dumping substandard products that they cannot sell in high-income countries.
This model doesn’t work during economic downturns. Multinationals that have to respond to faraway HQs that view Nigeria as a backwater cannot nimbly adjust to offer competitive prices, better quality, and response to changing consumer tastes. Therefore, it’s not surprising that the mostly Western multinationals have been losing market share to non-Western firms like Fidson Healthcare, Hayat Kimya AS and units of Tolaram Group Inc. with superior non-market strategies and a far better understanding of their consumers.
The loss of market share (and price-setting powers) have hit multinationals especially hard at a time when they needed to increase prices to keep pace with rising inflation and a spiraling currency depreciation (among other operational headwinds).
2) Collapse of the Naira is limiting firms’ ability to repatriate profits and escalating the cost of importing intermediary products and debt servicing:
Over the last three years Nigeria’s Central Bank has struggled to stabilize the Naira and achieve convergence between the official exchange range and the “real” rate on the streets. That struggle forced a massive devaluation that pushed the US dollar exchange rate from under 500 Naira to the current over 1560 Naira. In May the Central Bank raised the benchmark rate to 26.25%. The rapidity of the Naira’s decline was a massive hit for (foreign) firms that earned revenues in Naira but imported intermediary products and serviced their foreign debts in dollars.
It also led to acute dollar shortages that stifled operations (leading some foreign airlines to cancel services to Nigeria). Before March 2024 the Nigerian Central Bank had a backlog of about $7b owed to both domestic and foreign firms.
3) Decades-long underinvestment in infrastructure is compounding the cyclical challenges related to currency and emerging competition:
All economies go through business cycles, which may be worsened by global shocks. On this score, Nigeria finds itself in a ditch and with few options but to keep digging. Inflationary pressures related to COVID, the war in Ukraine, and monetary policy in United States hit hard. The Central Bank’s initial response destroyed its credibility with forex markets, while still inflicting inflationary pain in Nigerians via devaluation (in an import-dependent economy). The usual savior, oil, was missing in action. Relatively low oil prices worsened the impacts of decades of underinvestment in new oil wells as well as the habit of borrowing against future production.
In other words, things would not have been this bad for domestic and foreign firms in Nigeria if not for a series of policy mistakes over the last two decades.
For example, the poor quality of Nigeria’s transportation infrastructure and widespread power shortages are non-trivial drivers of inflation. Better transportation infrastructure would’ve given the economy a little bit more resilience during these hard times as far market creation and household earnings go (the spatial spread in prices of essential commodities like tomatoes is partially fueled by high transportation costs). Food inflation is high in part due to high transportation costs from farm to market and reliance on imports. The same goes for power. Nigeria produces only about one quarter of its 12,500 megawatts of installed capacity. Lack of grid maintenance, vandalism, fuel shortages, below cost consumer prices, and debt are to blame.
The Tinubu administration made things worse by abolishing fuel subsidies and allowing a massive Naira devaluation at the same time. The cost of transportation and power (including own generation power) have skyrocketed and are contributing to the ongoing inflationary spiral.
Overall, the structural shortcomings of Nigerian the economy are hurting both domestic and foreign firms. And the government is making things worse through poor sequencing of much-needed reforms. It is no wonder that the Nigerian economy has recently shrunk more precipitously than its regional peers (see above).
4) There is no sign that policy uncertainty and overall macroeconomic weakness (including household’s spending power) will abate soon.
The Tinubu administration promised bold reforms that would catapult Nigeria to the $1 trillion GDP club. However, he has so far floundered on implementation — especially on the sequencing of reforms. Faced with the political and economic consequences of trying to handle too many moving parts at once, he recently flip-flopped on the question of fuel subsidies in the face of public pressure.
The next important credibility tests will be i) Central Bank independence regarding price stability and the cost of credit to the private sector; ii) implementation of power sector reforms in the 36 states (including removal of subsidies for a subset of consumers); iii) willingness of raise revenue and spend more on public goods and services (Nigeria has an atrociously weak fiscal state); and iv) personnel changes in the administration (critical ministries like Power, Petroleum Resources, and Industry, Trade and Investment need fresh leadership with domain expertise).
The political pressure to recalibrate reforms will only increase, therefore further elevating policy uncertainty from firms’ perspective. Inflation is hitting Nigerians hard and shaving away their spending power and demand for consumer products. The current minimum wage is $20 per month (Labor unions want to increase the minimum wage from 30,000 Naira to 615,000 Naira). The IMF observes that the monthly cost of a healthy diet exceeds 80% of the monthly minimum wage. According to Fitch, the average household spends about 52% of its budget on food. Meanwhile, insecurity, infrastructure bottlenecks, and energy costs continue to disrupt food markets. In March annual food inflation reached 39.8%. Inflation is projected to remain elevated through 2025 (just below 20% YoY).
In 2024 real household spending is projected to decline by 3.1%. Importantly, Nigerian real household spending has been declining since 2019. There is more to the decline than the COVID shock. It would be mighty hard for any government to implement structural reforms under these circumstances.
III: The way forwad/putting things in perspective
Nigerian households are struggling without any respite in sight. Tinubu’s reforms have been at best grossly insensitive and at worst outright reckless. The sequencing of reforms could have been much better. Instead of maniacal focus on subsidies to save ever dwindling revenues from oil, the administration could have also made big and credible investments to boost the non-oil economy — especially with regard to electricity and roads. A more robust growth profile would significantly alleviate the public sector’s revenue squeeze. The dream of hitting $1 trillion in output ought to focus minds on growth, growth, and more growth.
All that said, there are reasons not to catastrophize about Nigeria’s prospects. Real growth is at 3.3%. And there are strong incentives for reforms — like Dr. Zainab Usman argues in her excelllent book, reforms happen in Abuja when oil prices leave little room for maneuver (which is the case right now). The biggest challenge going forward will be how to sequence reforms in order not to break the economy while trying to fix it. What does that mean for both domestic and foreign firms in Nigeria?
1) Ongoing creative destruction will select for sources of capital and firms that are rooted in Nigeria: To reiterate, all economies go through business cycles. Given this constant, economies are likely to experience sustained growth when important firms (and capital) aren’t always eager to rush for the exits at the hint of a downturn. Nigerian policymakers should therefore use the current crisis to identify and support domestic firms that are resilient enough to survive and multinationals that are willing to stay.
To be clear, some of the exits observed over the last few years are driven by attitudinal blinkers rather than business fundamentals. Sharma, an executive at Tolaram, is precisely correct:
While these companies are also struggling, they are too invested to leave, said Girish Sharma, chief executive officer of the Colgate Tolaram joint venture in Nigeria. “Things are tough right now,” he said, but adding “exiting is not an option.”
Nigeria needs patient capital that is incentivized to ride out cyclical downturns. That calls for greater policy support for national champions as well as foreign firms that are willing to invest in the Nigerian market for the long haul. At a fundamental level, policy should reflect the fact successful domestic firms are the best way to attract FDI (unfortunately, in much of Africa business policy tends to stiff domestic firms while chasing elusive FDI).
2) Tinubu’s administration should do a better job of sequencing reforms: As noted above, there is an urgent need to sequence the reform efforts related to taming inflation, stabilizing the Naira, removing costly subsidies and tax expenditures, introducing working markets to the power sector, and financing road construction. The government lacks neither the capacity nor the political capital do implement all these reforms at once. The resulting uncertainty over policy direction and stability is unhealthy for firms.
While I don’t presume to know the correct sequence, the two main lessons from the current inflation spiral are i) the government should do more to mobilize political support for policies through proper sequencing in order to avoid flip-flopping; and ii) reforms should give a lot more weight to growth-promoting production.
3) Increase public goods provision in tandem with increasing tax effort: The Nigerian state barely spends any money on its people. Government spending as a share of GDP (~12%) is among the lowest globally. This is no way to build markets in which private firms can flourish.
What does this mean for “ordinary” Nigerians? For example, the government spends about $23 per capita on education, an amount that is less than half the African average of $52 and significantly lower compared to countries like South Africa ($350), Kenya ($96), Ghana ($88) or even Mali ($32). The lack of investment shows in the quality of human capital across the country. This is also no way to cultivate tax morale. Furthermore, the low spending levels have historically enabled the state’s low tax effort and lethargic policymaking to promote growth. That must change. And to that end the state must boost growth (focusing on firms and jobs) and demonstrate that it will put additional revenue to good use providing essential public goods and services.
4) Energy and transportation infrastructure should dominate the administration’s attention: It is the height of policy malpractice that Nigeria missed out on the last hikes in oil prices (see below). This was mostly because the country had borrowed heavily against future production, barely maintained existing oil wells, and failed to invest in new production. Consequently, revenues from oil and prices have decoupled. Overall, this is a good thing: it will force reforms and diversification away from oil.
However, oil still presents a reasonable path towards recovery. Energy poverty is bad. With the singular objective to solving its energy crisis, Nigeria should aggressively invest in new production for the domestic and regional markets. Dangote’s refinery should not be importing oil from the United States! A large share of the additional revenue from oil production should be invested in road infrastructure in order to create a unified national market. If Tinubu does two things in his first term, it should be to solve Nigeria’s energy problems (especially power generation and distribution) and build a national transportation system.
IV: Conclusion
Implementing economic reforms in a country with fractious politics and entrenched interests that thrive in chaos is hard. It is therefore encouraging that the Tinubu administration has actually tried to reform previously-untouchable bits of Nigeria’s political economy — like fuel and power subsidies. That he’s flip-flopped on the fuel subsidies is understandable. The initial sequencing was off, and the inflationary death spiral so produced needed to be stopped.
At the same time, it is hard not conclude that in many respects Tinubu appears to want to have his cake and eat it. While touting and initiating some very important reforms, he also appointed to key positions individuals who leave a lot to be desired (especially Power, Transportation, and Trade & Investment). This janus-faced approach comes with a huge risk: there is a distinct possibility that the pain being inflicted on Nigerians in the name of much-needed bitter medicine will not yield any positive outcomes. The erosion of wealth through inflation, killing of hundreds of firms and countless jobs, not to mention the human toll, will all have been for naught. Tinubu and his team must understand that they cannot have their cake and eat it.
Finally, I am on recording stating my bullish outlook on Nigeria’s prospects. My position has not changed in light of the recent multinational exits. Nigeria needs patient capital. Dangote’s refinery is up and running and reducing the cost of energy (not to mention saving the economy scarce forex). He wants to do steel next!!! He’s also working to integrate the refinery upstream and jumpstart more oil production. Nigeria’s other conglomerates are angling to start building physical infrastructure. The decentralization of Nigeria’s power market to the 36 states is a step in the right direction (obviously, there will be subnational variation in implementation). It is now common knowledge that the Nigerian state must improve its fiscal capacity and spend more on public goods and services.
All these structural shifts are bigger than Tinubu and will chug alone (admittedly in a very messy fashion) with or without his administration’s positive input.
Also you keep saying that the sequence of the reforms were wrong. But you also claim that you don't know the correct sequence. So how do you know the sequence was wrong in the first place? Perhaps the reforms would have a caused a lot of economic hardship no matter what.
ken, a good article in Naked Capitalism today :
https://www.nakedcapitalism.com/2024/06/nyt-studiously-ignores-elephant-in-room-in-article-on-nigerias-crumbling-economy-the-central-banks-cbdc-experiment.html
in which the critique is that the catastrophic roll-out of CBDC destroyed much the the wealth of the un-banked and cash-reliant economy and large numbers of SME's as a result of widespread destruction of savings and wages. Meaning that the economy was in poor shape at the start for the current administration, notwithstanding the long term structural problems you analyse.
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