A perfect storm of rising inflation, declining consumer purchasing power, and stiff competition is battering Nigeria’s Micro, Small, and Medium Enterprises (MSMEs), with a staggering 67 percent reporting declining demand over the past two years, according to a new report by PwC Nigeria.
The heart of the problem lies in the relentless surge of inflation, which has sent the cost of living skyrocketing. A whopping 38 percent of MSMEs cited the high cost of products as the primary culprit behind the decline in demand, while 36 percent blamed the dwindling purchasing power of consumers.
The report also highlights the impact of consumer behavior shifts, with 12 percent attributing the decline to product switching and 10 percent to changing consumer preferences.
The survey of 567 MSMEs across the country paints a grim picture of an industry struggling to survive in a challenging macroeconomic environment.
Inflationary Pressure Mounts
Nigeria’s economic woes have been exacerbated by rampant inflation, which hit a record high of 34.19 percent in June 2024. Although there was a slight slowdown in monthly inflation rates since February, the trend reversed in June, defying expert predictions. The Central Bank of Nigeria (CBN) has forecast a decline to 21.4 percent by the end of the year, but experts warn of sustained inflationary pressures due to rising energy costs and exchange rate volatility.
“This is likely to increase the cost of inputs for MSMEs, which will, in turn, raise the prices of final goods and services, further impacting demand,” the PwC report warns.
These macroeconomic challenges are creating a perfect storm for MSMEs, as they grapple with increased input costs and reduced profit margins. The PwC report warns that the pass-through effect of rising inflation will likely lead to higher prices for goods and services, further dampening demand.
MSMEs: Backbone of the Economy Under Threat
The challenges facing MSMEs are particularly concerning given their vital role in the Nigerian economy. According to the NBS/SMEDAN MSME 2021 survey report, MSMEs contributed 46.32 percent to GDP, employed 87.9 percent of the workforce, and accounted for 96.9 percent of businesses. While their contribution to GDP declined slightly in 2021, their role in job creation remains paramount.
“The immense contribution of MSMEs makes them a critical part of Nigeria’s economic fortune,” the report emphasizes.
Despite the formidable obstacles, Nigerian MSMEs have demonstrated remarkable resilience. Sam Abu, country senior partner at PwC Nigeria, commended their adaptability in navigating a complex business environment. However, he emphasized the urgent need for supportive policies to unlock their full potential.
“Despite these challenges, Nigerian MSMEs have demonstrated remarkable adaptability in navigating a complex business environment characterized by challenging macro economy and government policies, highlighting their potential to drive economic growth,” Abu said.
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PwC Recommendations
To help MSMEs weather the storm and contribute meaningfully to economic growth, PwC recommends a combination of monetary and fiscal policies. These include:
Targeted support for MSMEs: Implementing policies that directly address the challenges faced by MSMEs, such as access to finance, capacity building, and market development.
Inflation control: Aggressive measures to curb inflation and stabilize the macroeconomic environment.
Improved business environment: Reducing bureaucratic hurdles and creating a conducive business climate for MSMEs to thrive.
Diversification: Encouraging MSMEs to explore new markets and products to reduce dependence on a few sectors.
The survival and growth of Nigerian MSMEs are crucial for the country’s economic recovery. By addressing the challenges they face, policymakers can unlock the immense potential of this vital sector and drive sustainable development.
