High FX, import costs limit business profitability – NESG

Nigeria’s business environment showed signs of improvement in January 2025, but businesses continued to struggle with profitability due to the high foreign exchange rate and rising import costs.

This is according to the latest Business Confidence Monitor published by the Nigerian Economic Summit Group in collaboration with Stanbic IBTC.

The report indicated that while commercial activity picked up at the start of the new financial year, firms remained under pressure from structural constraints, including limited access to foreign exchange, high financing costs, and inflationary pressures.

It read, “A key concern remains the high exchange rate of the local currency against major trading currencies, which, alongside rising import costs, continues to erode profitability and disrupt pricing strategies.

“Limited access to financing persisted as a major structural barrier, further hindering business growth throughout the month.”

The Current Business Performance Index rose to 5.69 in January from 0.77 in December 2024, reflecting a slight recovery. However, the cost of doing business remained high at 47.58, compared to 50.32 in the previous month.

Businesses also continued to grapple with frequent power shortages, restricted credit access, and uncertainty over economic policies.

The report identified the major obstacles to profitability as the high exchange rate and increasing import costs, which drove up operational expenses, while weak demand conditions hindered revenue growth.

Investment levels declined further to -27.50, indicating reduced capital inflows, and rising production costs, particularly in manufacturing and services, put additional pressure on profit margins.

Business performance varied across key sectors. The manufacturing sector recorded a marginally negative performance of -0.66, though this marked an improvement from -2.43 in December.

High production costs, difficulty in accessing foreign exchange and weak consumer demand remained significant challenges.

The cost of doing business in the sector stood at 41.57, reflecting the high cost of operations, while operating profit remained negative at -17.41. However, production levels improved to 46.56, supported by increased output.

The textile, apparel, and footwear sub-sector recorded one of the steepest declines at -27.71, while the motor vehicle and assembly sub-sector faced a severe contraction at -37.14.

The non-manufacturing sector, which includes oil and gas services, construction and natural gas, declined to -4.64 in January from 5.80 in December, reflecting subdued business activity.

Investment levels in the sector dropped sharply to -55.38 as firms held back on expansion due to economic uncertainty, high borrowing costs and policy concerns.

The cost of doing business rose to 29.19, largely driven by foreign exchange volatility and high logistics costs, although cash flow improved to 53.96 as firms sought to manage their finances more effectively.

The services sector remained under pressure, recording a mildly negative performance at -1.40, though this represented a slight improvement from -3.46 in December.

Broadcasting recorded a significant decline of -30.35, while professional services also posted a negative performance at -5.92.

However, telecommunications and information services performed better at 6.14, while financial institutions and real estate recorded 37.83 and 18.67 respectively, buoyed by seasonal demand. The cost of doing business in the sector surged to 37.68, further straining profitability.

The trade sector showed signs of recovery as its index improved to -0.84 from -5.59 in December, reflecting better sales performance at the beginning of the year.

While the wholesale segment remained in negative territory at -2.87, the retail segment returned to positive growth at 1.20.

The sector benefited from increased consumer spending and trade restocking, leading to an improvement in cash flow, which rose to 18.13. Despite these gains, high borrowing costs, limited access to credit, and persistent price volatility remained major constraints.

The agriculture sector remained the only positive performer, recording 10.86, although growth slowed compared to the previous month.

Crop production and livestock posted modest gains of 16.96 and 5.66, respectively, while agro-allied and forestry struggled with high input costs and weaker demand, posting -9.17 and -1.07.

The sector continued to benefit from strong demand conditions, which stood at 72.50, though investment levels declined to -27.20 as businesses remained cautious about expansion.

The report noted that business expectations for the next three months remain moderately optimistic, with the Future Business Expectation Index rising to 31.96.

The manufacturing sector was the most optimistic, posting 57.31, followed by non-manufacturing at 50.07, agriculture at 35.87, and trade at 34.35. The services sector was the least confident at 14.39, reflecting persistent cost pressures.

Businesses anticipate improvements in production, cash flow, employment, and operating profit, although concerns over inflation, high interest rates, and weak consumer purchasing power remain potential risks to growth.