Nigerian companies risk total collapse over rising energy cost, FX crisis

An economist, Bismark Rewane, and other experts have predicted that the high cost of power and diesel will lead to the collapse of many businesses.

Rewane, who said this in a telephone conversation in Lagos on Sunday, said that businesses were under pressure and the margins were being compressed.

He noted that there was an increase in the cost of power, which was unpalatable to businesses.

“Two things are happening: one electricity supply has dropped and the price of diesel went up by 300 per cent. So, when you add the two together you will find out that there was an increase in the cost of power.

“Two, the foreign exchange availability was reduced significantly. Therefore, people became desperate to replace their inventory. Therefore, it is not surprising that businesses are under pressure and their margins are being compressed. The point is that with the cumulative effect of the decadence and adequate pricing, the cost of producing electricity is much more than what the tariff is giving them.

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“Therefore, unfortunately, every day they produce they are moving closer and closer to their collapse. Because in economics, you produce where your marginal revenue is equal to your marginal cost, but here, the marginal cost is higher than the marginal revenue.

“That is the basic rule of economics and that is happening in the electricity market. And for the foreign exchange market, the supply of forex from basic inventory is not available and, therefore, the more unavailable it is the more people have to buy forex at a prohibitive cost. So, cumulatively, all of these things are leading to a massive increase.”

Also speaking, a member of the Nigerian economic Summit Group, Dr. Ikenna Nwaosu, said, “This has been spoken by so many people and even if I should speak, I will be speaking like a broken record. The Presidential Economic Advisory Committee has previously listed the implications of this state on the economy.

“I think that is the highest economic advisory body to the government aside from the National Economic Council. So they have listed it, the question is: What is the government doing about this? We don’t have a response.