The Nigerian telecommunications sector, a significant contributor to the nation’s GDP, navigates a complex financial landscape marked by declining credit access, macroeconomic headwinds, and a push for tariff increases. As of September 2024, telecommunication companies and other Information and Communication Technology (ICT) firms owed Nigerian banks N1.69 trillion. While this figure represents a slight year-on-year decrease, reflecting the impact of the Central Bank of Nigeria’s (CBN) aggressive interest rate hikes, it also signifies a month-on-month increase, highlighting the sector’s ongoing financial pressures. The debt level underscores the challenges faced by these companies as they grapple with rising operational costs, volatile exchange rates, and the need for substantial investments in network infrastructure.
A closer examination of the credit trends throughout 2024 reveals a fluctuating pattern. While the year began with a significant surge in borrowing, likely due to pent-up demand and optimistic projections, the trend quickly reversed as the CBN implemented its monetary tightening policies. Each subsequent month witnessed a decline in credit access, illustrating the adverse impact of rising interest rates on the sector’s borrowing capacity. This cautious approach to borrowing reflects the broader economic uncertainties and the high cost of capital, forcing companies to re-evaluate their investment strategies and prioritize financial prudence.
The CBN’s aggressive interest rate hikes, totaling 875 basis points throughout 2024, played a pivotal role in curbing inflation and stabilizing the economy. However, these measures also significantly increased the cost of borrowing for businesses, particularly in capital-intensive sectors like ICT. The record-high monetary policy rate, reaching 27.50% by November, made it more expensive for telcos to access funds for network expansion and upgrades, potentially hindering their ability to meet the growing demand for data and voice services. This, coupled with macroeconomic challenges like exchange rate volatility and rising operational costs, further constrained borrowing activity within the sector.
Despite these financial constraints, the ICT sector remains a crucial driver of Nigeria’s economy. In the third quarter of 2024, the sector contributed 16.35% to the nation’s real GDP, driven primarily by the telecommunications sub-sector. This underscores the importance of telecommunications in facilitating economic activity across various sectors. However, the sector also experienced a significant decline in foreign investments during the same period, raising concerns about its long-term growth potential. The drop in foreign direct investment (FDI) highlights the challenges posed by the current economic climate and the need for policy interventions to attract further investment.
The decline in FDI, coupled with the reduced borrowing capacity, has impacted the capital expenditure of major telecommunication companies like MTN Nigeria and Airtel. Both companies reported substantial drops in their core capital expenditure during the first nine months of 2024, reflecting the financial pressures they face. This reduced investment in infrastructure could negatively impact the quality and coverage of telecommunication services, potentially hindering the sector’s contribution to economic growth. The situation underscores the need for a balanced approach to economic policy, ensuring macroeconomic stability while also fostering an environment conducive to investment in critical sectors like telecommunications.
In response to these economic realities, Nigerian telecommunication companies have intensified their calls for tariff hikes. Citing high inflation, forex fluctuations, and the need for sustained investment in infrastructure, they argue that current tariffs are not cost-reflective. After years of advocating for price adjustments, the government has finally granted approval for a tariff increase, albeit with the condition that telcos commit to increased investments in network infrastructure. This decision represents a delicate balancing act, aiming to ensure the financial sustainability of the telecommunications sector while also protecting consumers from excessive price increases. The effectiveness of this policy will depend on the telcos’ adherence to their investment commitments and the government’s ability to monitor and regulate the sector effectively.
