Business

Why rising interest rates and business costs will continue – Olufemi Oyinsan, TCVP General Partner

In an era of soaring inflation and escalating interest rates, Nigerian businesses are facing unprecedented challenges in maintaining profitability and securing capital. Olufemi Oyinsan, General Partner at The Continent Venture Partners (TCVP), sheds light on how these economic pressures are reshaping the business landscape in Nigeria.

In this interview, Oyinsan discusses the impact of rising costs, reduced consumer purchasing power, and the increasing difficulty of accessing loans, while offering strategic solutions for businesses to navigate this turbulent environment.

Investment and confidence are critical, and with the background of what you do at your company and how you invest in African entrepreneurs, how do you think the current situation, particularly across Africa, affects businesses? We’re in a high monetary policy era – how do you see these policies affecting businesses in Nigeria and across the continent?

With the rising rates, and I don’t even think we’re at the ceiling yet of the rates, one thing that’s very clear is that it makes doing business more expensive. Accessing loans is harder. Most businesses, as they grow and expand, will seek capital – whether it’s equity from people like ourselves or other businesses trying to get loans – and it just means that the cost of doing business is higher. Consequently, profitability is reduced. We’re seeing this not just in Nigeria but across the continent; it’s a global issue. Rates are going up everywhere. So, for businesses to turn the same profit or even better to deliver for their investors, they need to work harder. The first hurdle is repaying your debt, and the second is achieving profitability to give returns to the people who have invested. There’s definitely a squeeze on businesses, both in the country and across the continent.

Would you say there are enough fiscal policies in place to cushion the effects of these monetary policies? Or do you think there’s an imbalance?

Not so much. The first thing to note is, why are they raising rates? They’re raising rates because inflation is running away, and they’re trying to cool it by mopping up extra cash in circulation. So, there’s a reason; it’s not just that they’re crazy. But inflation is still persisting, and we’re not seeing the desired results yet. Regarding the fiscal side, I would say no – people are still screaming that the environment is tougher. Subsidies have been removed, and there’s less money in people’s pockets, so businesses have to be creative and clever to survive and balance things out. The cushioning effects are still slightly further out, and we don’t see enough of it yet.

Nigerian inflation is high, and Kenya has seen protests due to the introduction of certain taxes in their Finance Bill. How do you think rising inflation, combined with exchange rate pressures, will impact the economy and the business landscape in Nigeria?

You can’t really separate the business landscape from the economy. The most obvious long-term effect of rising inflation is that purchasing power is decimated. There’s less money in people’s pockets. For businesses, whether big or small, it’s about the amount of money left in people’s pockets, which is a function of disposable income. When inflation rises, people must spend more on essentials like rent, food, transportation, and energy, which leaves less for discretionary spending. That directly impacts businesses because they rely on discretionary spending. Another part people don’t focus on is that it also affects investments. When disposable income is squeezed, there’s less money available for investments, which stifles business growth.

The Debt Management Office (DMO) reported that Nigeria’s debt is over N120 trillion, with an increase of about N24 trillion in three months, partly due to devaluation. Is there a link between rising debt and the business environment, and what are the likely implications?

The way I like to look at public debt is different. The debt-to-GDP ratio is often used, but debt itself isn’t necessarily bad – it’s how the debt is used that can make it bad. The question is, with all the borrowing, what are they doing with it? Nigeria needs to borrow money to fix infrastructure, create a better business environment, and improve things like power and roads. However, the issue is we’re borrowing, but we’re not seeing the effects. If the money was invested well, we would eventually see the cost and ease of doing business improve. Instead, a large part of the budget goes toward servicing debt, leaving less for essential investments. If previous borrowing had been used effectively, we’d be coming out on the other side by now.

Last year, we saw GSK exit the Nigerian market, which had a significant impact on drug prices. What do you think led to this exit, and what are the broader implications for the Nigerian economy?

The exit of companies like GSK is primarily driven by inflation, energy costs, and foreign exchange issues. Multinational companies in Nigeria struggle with dropping consumer purchasing power and the high cost of doing business, especially with energy and logistics. On top of that, they face challenges in repatriating profits due to currency devaluation. This makes it unsustainable for them to operate. When a large player like GSK exits, it affects local manufacturing and value creation. Instead of manufacturing locally, they shift to importing products, which reduces local value creation and increases costs for consumers.

There’s often a link between global geopolitical tensions and domestic economic challenges. How do you think geopolitical tensions, like the Russia-Ukraine war, impact Nigeria’s trade and business environment?

The Russia-Ukraine conflict has had a significant impact, particularly on food prices. Before the war, people didn’t realize how much of our food supply, like wheat, came from that region. When that supply chain was disrupted, it drove up food prices globally. Similarly, insecurity in Nigeria’s food-producing regions has disrupted local food supply chains, driving up prices. These geopolitical tensions and domestic security challenges have made it harder for businesses to operate and for people to afford essential goods. The government needs to understand that security isn’t just a law-and-order issue – it’s also an economic issue.

With rising interest rates, how can Nigerian businesses navigate the challenges of borrowing money to finance their operations?

Businesses need to become more capital-efficient. They need to cut unnecessary costs and focus on optimizing resources. For startups, the focus should shift to sustainability and profitability. The message now is clear: businesses must find a way to become profitable as quickly as possible. Debt is more expensive, so businesses must think carefully about whether debt or equity is the best financing option for their growth. It’s time to get creative and sensible about how they raise and use capital.

There has been a decline in funding for African tech startups compared to the boom in 2020-2021. What do you think has changed?

A few things have changed. First, rising interest rates globally have made safer investments more attractive. Investors are questioning whether it’s worth taking the risk in Africa when they can get stable returns elsewhere. Policy uncertainty, currency devaluation, and challenges in repatriating funds have also reduced investor confidence. However, we’re seeing more local investors stepping up, which is a positive development for the long term.

What is your outlook for the future of African startups, and what recommendations do you have for them?

African startups need to mobilize local capital because relying on foreign investors isn’t sustainable. We need to develop solutions tailored to Africa’s unique challenges. Local investors, such as pension funds and high-net-worth individuals, need to take more risks and invest in local startups. We also need to talk more about the successes in the ecosystem to attract more investment.

Lastly, with Nigeria in a transitional period and concerns about policy inconsistency, how do you see the evolving regulatory environment shaping the future of business operations?

Regulation is evolving, and that’s a good thing. The regulators’ role is to protect consumers and build confidence in the sector, while innovators push the boundaries. There will always be tension between the two, but with more collaboration, we can minimize disruptions. It’s important for regulators to engage with innovators to ensure that policies support growth without stifling innovation.

 

 

 

 


Source: Naijaonpoint.com.

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