The impact of high inflation on Small and Medium Enterprises in Nigeria

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Introduction

Inflation is a persistent economic phenomenon that affects nations worldwide. In Nigeria, the issue of high inflation has been a longstanding concern, with implications for various sectors of the economy. Small and Medium Enterprises (SMEs), often considered as the backbone of the Nigerian economy, are particularly susceptible to the adverse effects of inflation.

This article explores the impact of high inflation in Nigeria on SMEs, providing valuable insights with references to the current economic landscape.

Understanding inflation in Nigeria

Inflation can be defined as the sustained increase in the general price level of goods and services over time.

In Nigeria, inflation has been a recurrent challenge, with both demand-pull and cost-push factors contributing to its persistence. Factors such as rising production costs, exchange rate fluctuations, and monetary policy decisions have all played roles in driving inflation upwards.

The plight of SMEs

SMEs form a crucial part of Nigeria’s economy, contributing significantly to employment, innovation, and economic growth. However, they face several challenges, and high inflation exacerbates these issues.

Here are some ways in which inflation impacts SMEs:
1. Reduced purchasing power: High inflation erodes the purchasing power of consumers, making it difficult for SMEs to maintain sales levels or increase prices. As consumers’ real incomes decrease, they may cut back on non-essential spending, directly affecting SMEs.
2. Increased Operating Costs: SMEs often operate on tight budgets, and high inflation can lead to escalating costs for raw materials, energy, and labor. This makes it harder for them to maintain profitability and can force some to downsize or even close.
3. Uncertainty: Inflation creates an environment of economic uncertainty. SMEs may struggle to plan for the future, as it becomes challenging to predict costs, prices, and consumer behavior accurately. This hampers long-term business strategies.
4. Access to credit: Inflation can lead to higher interest rates, making it more expensive for SMEs to access credit. Many SMEs rely on loans for expansion, and when borrowing costs rise, it can stifle growth prospects.
5. Exchange rate volatility: The Nigerian economy is highly dependent on imports for various inputs and finished products. Exchange rate fluctuations driven by inflation can disrupt supply chains and increase costs for SMEs reliant on imported goods.

Mitigating the impact

While the impact of high inflation on SMEs in Nigeria is substantial, there are strategies that can help mitigate these effects:
1. Diversification: SMEs can reduce risk by diversifying their product offerings and markets. This can help cushion the impact of inflation in specific sectors or regions.
2. Efficiency improvements: Enhancing operational efficiency can help SMEs reduce costs and maintain profitability in the face of inflation. This may involve adopting technology, streamlining processes, or renegotiating contracts.
3. Access to finance: Building strong relationships with financial institutions and exploring alternative sources of financing can help SMEs secure capital at favorable terms, even in inflationary environments.
4. Government support: Government policies and initiatives that address inflation and support SMEs are vital. This includes stable monetary policies, access to credit facilities, and targeted assistance programmes.

Conclusion

High inflation in Nigeria poses significant challenges for SMEs, affecting their growth, profitability, and overall sustainability. Understanding these challenges and implementing strategies to mitigate their impact is crucial for the resilience and success of SMEs in Nigeria.

To achieve this, collaboration between government agencies, financial institutions, and SMEs themselves is essential.
By addressing the root causes of inflation and supporting SMEs, Nigeria can foster a more robust and sustainable economic environment for all stakeholders.

SMEs worried about rising cost of doing business in Nigeria – Survey

A recent report by the Mastercard Eastern Europe, Middle East and Africa SME Confidence Index has indicated that small and medium enterprises in Nigeria are concerned about the rising cost of doing business.

The survey also indicated that from surviving to thriving in the post-COVID world, SMEs in Nigeria are projecting similar or increased revenues in 2023.

It also suggested that future growth will be driven by omnichannel payment solutions, access to credit funding and digitizing business.

Mastercard’s Country Manager and Area Business Head for West Africa, Ebehijie Momoh, stated that the second edition of the survey revealed that while 63 percent of SMEs across Nigeria are confident about business growth, about 97 percent believed that omnichannel payments present the biggest opportunity for businesses.

He stated that the survey also found that six out of 10 SMEs in Nigeria are optimistic about the future. “78 percent of SMEs projects increased or similar revenues in 2023. The survey reveals that 63 percent of micro and small businesses are optimistic about the next 12 months while their medium-sized counterparts run behind at 33 percent.”

According to him, the 2021 inaugural SME Confidence Index delved into the impact of the pandemic on SMEs across sectors, products and services, and how businesses are embracing a digital future.

“As companies recover from the pandemic and return to growth phase, the research shows that 55 percent of SMEs in Nigeria are concerned about rising cost of doing business in 2023 and access to capital funding accounts for 42 percent,” Momoh stated.

He stated further that the survey highlighted the top three areas of growth opportunities for SMEs in Nigeria, which are access to training and development (95%), digitizing business (93%) and access to better data, analytics and insights (89%).

However, insufficient access to credit and inflation remain key factors affecting business growth in Nigeria.

“We are encouraged by the findings of the Mastercard SME Confidence Index, which demonstrates the resilience and optimism of SMEs in Nigeria.

It is inspiring to see that 78 percent of SMEs project similar or increased revenues in 2023.

“At Mastercard, we are committed to supporting small businesses and merchants by leveraging our network, technology, and partnerships. In an evolving commercial landscape with changing spending patterns, we recognize the importance of connections and inclusivity. We will assist businesses in accessing credit and maintaining stable cash flow.

“We will provide them with valuable insights through analysis and digital training. Moreover, we will empower them to embrace digital solutions, enabling fast electronic payments, fostering business growth, and safeguarding against cyber threats,” Momoh stated.

According to him, Mastercard leverages its extensive network, state-of-the-art technology, and global partnerships to help SMEs adapt to changing commercial environments and new spending patterns. He stated that the company works with governments and the private sector to build synergies that advance financial inclusion and motivate consumers and merchants to support small businesses.