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The past year was tumultuous for business. Much of it was defined by COVID-19 and its effects on the economy. The virus blighted most of the commercial landscape in the first half of 2020; many businesses spent the second half of the year cutting their losses and rebuilding from a disadvantaged position. There’s a shared hope that 2021 will bring better fortunes for the enterprise.
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Small businesses are especially keen that this be true. They have borne the brunt of the economic downturn; not a few have shut down permanently as a result. Large swathes of this segment will be relying on turning tides this year to stay afloat. If you run an SME and you’re wondering what to expect in 2021, we have a list of things you should be looking out for. They could be the determinants for industrial growth over the next twelve months.

Inflation and Consumer Disposable Income

Nigeria’s real sector is currently under pressure from rising inflation. In November, it climbed 14.89%, the highest it’s been since January 2018. Food prices were particularly affected. Vendors and customers alike complain about the expensiveness of rice and onions. If this trend persists, businesses will have to deal with higher production costs for a while yet. Unfortunately, income levels haven’t kept up with rising inflation. Available figures suggest they declined in 2020. As a result, customers may have less money to spend on products and services— besides their trouble with the cost of those items. Small businesses will be banking on a reversal of the current inflationary trend to brighten up the outlook for their potential sales and revenues.

Land Borders Reopened

The Nigerian government had shut the country’s border with the Republic of Benin in August 2019, in what it said was a response to smuggling in the area. In March 2020, other land borders were shut to prevent the spread of coronavirus. These closures had a significant impact on trade. Businesses that relied on imported raw materials struggled to cope; exporters had to find alternative means of getting their goods out of Nigeria.
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A broad segment of analysts has partly blamed the border closure for the country’s accelerated price inflation. The scarcity of certain imported products at the local markets (and the shortage of local substitutes) may have forced prices higher. Thankfully, the borders were reopened on December 15. It’s hoped that normal cross-border commerce will return as the year progresses; many businesses will be eager to take advantage of this situation.

Nigeria’s FOREX Challenges

Nigeria’s foreign exchange earnings have declined, thanks to lower crude oil prices. With fewer dollars in circulation, the naira’s value versus the dollar has declined. As of December 31, 2020, a dollar exchanged for ₦410 at the Investors and Exporters Window, an annual decline of over 10%. In a bid to save the naira from depreciating further, the CBN has tried to restrict the purchase of dollars. The result has been a scarcity of FOREX—a situation that has hurt importers, who need foreign currency to buy products from other countries. A lot of these imports are raw materials used by manufacturers in Nigeria, so the FOREX scarcity has impacted local industries as well. A substantial increase in international crude oil prices could boost Nigeria’s foreign exchange earnings and reduce the pressure on the naira. But it’s still not clear if this is likely to happen in 2021.

Distribution Costs

There was a sustained rise in the price of petrol (Premium Motor Spirit, or PMS) towards the end of the year 2020. This caused an increase in transportation costs. If this trend continues, businesses will have to pay more for distribution. They may be forced to peg their product prices higher to meet up with elevated production costs. Given customers’ low appetite for price increases (disposable incomes aren’t great at the moment), these higher production costs could lead to depressed sales. On the other hand, there’s always a chance that PMS prices will stabilize, with the outcome being that distribution costs will level out.

COVID-19 Related Restrictions

Restrictions on movement and commerce were introduced to combat the first wave of COVID-19. Several of these were lifted later on. However, they could be reintroduced if the government deems this a fitting response to the second wave of coronavirus infections. Those limitations have had a big impact on business. They were largely responsible for the decline in economic output witnessed in the second and third quarters of 2020— and the resultant recession. At this stage, the government is being careful about reintroducing restrictions. Businesses will hope that the threat from COVID-19 will dissipate, and allow them to return to full functionality.   Featured Image Source: Research Leap
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This article was first published on 7th January 2021

ikenna-nwachukwu

Ikenna Nwachukwu holds a bachelor's degree in Economics from the University of Nigeria, Nsukka. He loves to look at the world through multiple lenses- economic, political, religious and philosophical- and to write about what he observes in a witty, yet reflective style.

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