Inflation, Massive Naira Devaluation Threaten Telecom Firms’ Survival

Concerned by the possible collapse of the telecommunication sector, which has been plagued by high inflationary pressures and currency devaluation, telcos are demanding a change in its tariffs but government is unconcerned, DAMILOLA AINA writes

The Nigerian telecommunications sector is in jeopardy as it grapples with a raging storm of underinvestment and inflationary pressures. The challenge fueled by inconsistent government policies in form of an all-time high inflation rate and forex crises among others has set the industry on a downward trend with customers bearing the brunt of subpar data and call services.

Operators find themselves in a challenging position, anxiously awaiting government intervention to help them remain viable. Despite their urgent pleas for regulatory and policy support, these requests have been met with an outright deafening silence, leaving them in a precarious situation.

Hence, the industry that was once the poster boy of capital investments in Nigeria is gradually becoming a shadow of itself, no thanks to global volatility, and country-specific risks, driven by record losses and weakened financial performance among operators.

This significant fall is attributed to a challenging operating environment characterised by burgeoning inflation and currency depreciation. Industry players are contending with coma-inducing challenges, particularly regarding operational costs. These challenges are exacerbated by factors such as foreign exchange devaluation and scarcity. Others are soaring diesel prices, escalating input costs due to the naira’s depreciation, and rising inflation, which reached 33.88 per cent in October 2024.

Since its emergence in the early 2000s, the telecoms sector has been a cornerstone of the Nigerian economy, which heavily relies on its services sector. Notably, it played a crucial role in helping the country recover from a recession in the fourth quarter of 2020.

According to a Global System for Mobile Communications Association report, Nigeria has experienced rapid growth in mobile broadband coverage due to its highly competitive telecommunications sector.

It stated that with several large mobile service providers and some significant fibre-only network operators, “MTN is the largest mobile service provider with 50.50 per cent subscriber market share. This is followed by Airtel, Globacom and 9mobile with 34.76 per cent, 12.39 per cent and 2.35 per cent respectively.

“The digital sector contributes to the overall economy that is broader than the direct value-added by companies in the sector itself. The largest contribution to overall GDP is through the sector’s impact on productivity of other sectors.”

But the sector now lies at the brink of collapse, as the soaring costs of servicing a rapidly growing population of 218 million mobile subscriptions and 92 million broadband internet subscriptions threaten its sustainability.

Investment in infrastructure is dwindling, leading to a sharp decline in network expansion and maintenance. As a result, network services are increasingly strained, causing widespread connectivity issues that affect millions of individuals and businesses alike.

Government oversight remains a distant observer rather than an active participant in addressing the sector’s mounting crises. The sector’s vulnerability underscores a critical need for strategic intervention and support to stabilize and rejuvenate this essential component of Nigeria’s infrastructure.

It’s no gainsaying that the telecommunications industry is facing its hardest moment since the liberalisation of the sector in 2001 with over $68bn investment facing threats.

Sector’s many problems

The removal of fuel subsidy and the harmonisation of foreign exchange rates exacerbated inflation in 2023 and have sustained momentum in the current year. Between January and May (before the two policies kicked in), inflation rose from 21.82 per cent as of January 2023 to 22.41 per cent as of May 2023. Inflation jumped from 22.79 per cent as of June 2023 to 29.90 per cent as of December 2023 after implementing the policies.

Headline inflation increased further by 16.72 per cent between January (29.90 per cent) and June 2024 (34.40 per cent before a momentary drop to 33.40 per cent in July, the first decline since December 2022. Costs of products resumed their upward in August and have remained bullish.

Analysts expect another inflation surge in the coming months following a recent hike in the price of premium motor spirit to above N1,060 per litre. The poorly implemented policies, according to Nigerians, have resulted in a weakened purchasing power for many citizens with attendants’ effects on businesses.

High inflation is creating hardships in Nigeria, the International Monetary Fund recently disclosed. It also explicitly stated that broad-based economic reforms embarked upon by the current federal government are still struggling for a positive impact, 18 months after commencement.

Additionally, the naira has experienced a dramatic decline across both official and parallel markets, with the government’s ongoing efforts to stabilize and strengthen the naira against the US dollar ineffective, and the value of the currency plummeting at an alarming rate.

In one year, the currency has lost 108 per cent in value, between a period spanning November 2023 and 2024 at the official foreign exchange market due to dollar shortages, despite the policy measures implemented by the Central Bank of Nigeria.

This is despite the external reserves, which give the CBN firepower to defend the naira increase in 13 months by 20.3 per cent or $6.78bn to $40.8bn as of November 26, 2024. This amount was from $33.46bn recorded on September 4, 2023, according to data from the CBN.

At the parallel market, popularly called the black market, the naira lost 88.17 per cent in value as the dollar was sold at the rate of N1,750 on Friday, November 29, 2024, as against N930/$1 sold in the corresponding period of September 8, 2023, data from street traders and some online platforms that collates exchange rates at the unregulated market revealed.

These developments paint a bleak picture of the current economic situation in Nigeria and amid all these, discourse around telecoms tariff review is beginning to take centre stage, drawing attention to the need for a delicate balance between economic realities, quality of experience, which impacts directly on customer satisfaction, and telecommunications industry sustainability.

In Nigeria’s telecommunications sector, diesel consumption is a critical factor influencing service reliability and progression. With numerous sites dispersed across the nation, a substantial portion operates on generators 24/7, necessitating continuous fuel supply. This escalating cost of diesel needed to power over 40,000 base stations not only directly impacts operational expenses but also cascades into broader challenges of infrastructural maintenance. As prices soar across various sectors, the telecom industry continues to grapple with the dilemma of maintaining quality services while operating within constrained pricing frameworks. This has overshadowed the subscriptions and revenue growth recorded by the operators.

The nine-month report of major telcos listed on the Nigerian exchange showed that MTN made a profit of N4.1bn but recorded a significant loss after tax of N514.9bn, primarily driven by substantial foreign exchange losses. The largest telecom operator also disclosed an adjusted profit after tax of N118.5bn, reflecting a 59.2 per cent decrease compared to the previous year.

This adjusted figure indicates that, without the forex losses, the company would have reported a profit during this period.

Airtel Nigeria Profit after tax of $79m was impacted by $151m of exceptional derivative and foreign exchange losses (net of tax), arising from the further depreciation in the Nigerian naira during the period.

MTN boss reacts

Speaking at the launch of the Nigeria Digital Economy Report published by the GSMA in May 2024, the Chief Executive Officer of MTN, Karl Toriola, lamented the investment climate for Mobile Network Operators stressing that the difficult macro-economic challenges have drastically reduced investors’ appetite to stake their money in the capital-intensive sector.

The report launched by the GSM Association, an international organisation that represents the interests of mobile network operators worldwide, analyses the Nigerian economy and the government’s digital transformation strategy.

Toriola noted that the return on capital for the telecom industry is currently negative due to a dearth of continuous heavy investments to maintain and upgrade its infrastructure unlike the banking and other sectors.

He said, “Let me start by saying that we have been very successful in this industry. Unfortunately, to some extent, we are now victims of our success because when you hear headlines of N2tn revenue, the instinctive reaction is that we are making so much money.

“But the reality is, our return on capital for the telecom industry is at the moment negative and even at its best periods if you take N100m and put it in banking, telecoms and other sectors, telecoms have the lowest return and that was pre-naira devaluation.