10, 2020 / 12:34 PM / by CSL Research / Header Image
Last week, the Nigerian Electricity Regulatory Commission (NERC) and the Distribution Companies (Discos) finally effected a hike in the unit price of electricity after many years of going back and forth. The increase is said to be more than 50%. Whilst still trying to recover from the news, the Executive Secretary of the Petroleum Products Pricing Regulatory Agency (PPRA) Abdulkadir Saidu has come out to say that PMS prices would henceforth be determined by the forces of demand and supply and the international cost of crude oil and the agency would no longer release guiding price bands for Premium Motor Spirit (PMS). The official pump price of PMS is currently up from N125/litre in March to N159/litre - N162/litre currently. Across all daily essentials, there have been an increase in the cost of food, transport, medicare etc.
The economic recession witnessed in 2015-17 had a major impact on Nigerian households, eroding their purchasing power and driving joblessness across the country. The pressure on disposable income was further exacerbated by the impact of higher petrol and food prices, leading to higher cost of living in the face of muted growth in disposable income. Although, the exit from recession in Q2 2017, buoyed largely by higher crude oil prices and stability in the domestic production of crude oil was expected to translate into improved consumer spending, a sluggish pace of recovery amid rising population has left consumers still financially stifled. Since the emergence from recession, GDP growth has been underwhelming, falling short of the nation's population growth of c.3%, leading to falling GDP per capita. The onset of the global pandemic has worsened the situation and with negative GDP growth in Q2 2020, it is clear that the country is headed for another recession, making it the second in four years.
The hikes in key consumer utilities (Fuel & Power) though considered free market reforms that should keep both sectors in tune with market realities and drive efficiency, are ill-timed in our view. Income levels in general, have failed to keep pace with the steep rise in living costs resulting from the accelerated cost-push inflation over recent years. Loss of jobs induced by the pandemic has left many consumers highly improverished. The global pandemic has led to many businesses cutting workforce or implementing steep salary cuts. Expectedly, unemployment level rose to 27.1% while unemployment & underemployment combined to settle at 55.7% at the end of Q2 2020 according to the National Bureau of Statistics. In addition, we note that consumers are still reeling from abysmal growth in income, double-digit inflation and increase in VAT rate to 7.5% earlier in February 2020.
However, as has been the case over the past few years, we expect consumers to remain price-sensitive and continue trading down to cheaper and unbranded alternatives where possible. We expect spending on discretionary purchases to be very limited and when necessary, only cheaper alternatives would most likely be bought. As things stand, we expect this will negatively impact revenue of consumer companies with very elastic product portfolios and presence of higher mix of premium products in their product mix.