Telecommunications: Price increases to the rescue, but how much more room?

Based on news report, telecommunication companies are proposing a 40% increase in the cost of calls, SMS, and data to the Nigerian Communications Commission as a result of the rising cost of running a business in the nation. Based on their proposal, the price floor of calls will increase from N6.4 to N8.95 while the price cap of SMS will increase from N4 to N5.61.

According to the Association of Licensed Telecommunication Operators of Nigeria (ALTON), the telecommunication industry has been financially impacted following the nation’s economic recession in 2020 and the effect of the ongoing Ukraine/Russia crisis, resulting in an increase in energy costs, increasing their operating expenses by 35%.

Many Nigerian businesses continue to face economic challenges from the steep depreciation of the currency to inflationary pressures, and more recently, supply chain crisis resulting from the Russia Ukraine war, which has led to a substantial increase in the prices of goods and services. Without leaving the telecom operators behind, they have also witnessed the increased operational costs of providing telecommunications services.

Moreso, many of the equipment/infrastructure used to provide services are sourced internationally, requiring FX and they have had to resort to the parallel market amid the FX scarcity. Also, there are reports that some states allegedly demand higher right of way charges from the telecom operators beyond the maximum of N145/linear metre set by the government.

The Nigerian Communications Commission (NCC) has the statutory responsibility to set the voice and data tariff floor in the country with the aim to promote healthy competition. Thus, the decision to either raise rates as proposed by the ALTON or retain rates solely rests with the regulator. However, we believe the regulator in its decision will consider a number of factors including the affordability of services for subscribers post-upward review of price cap, its impact on broadband penetration and particularly, the ongoing NIN-SIM
integration exercise. Relating to these highlighted factors, we believe the regulator considering current economic realities may either advise the operators to maintain the status quo or determine an interim price floor not as high as provided by the ALTON.

Recently released Q1 numbers have shown growth in Revenue from many of the consumer goods companies and industries, but mainly driven by price increments. Since 2012, the Nigerian consumer has come under severe pressure. From partial fuel subsidy removals to the free fall in naira in recent years, to the imprints left by the border closure to insecurity in food processing regions, to electricity price hikes and more recently, supply chain
disruptions caused by the Russian Ukraine war. All these have contributed to inflationary pressures.

In response, the average Nigerian consumer has been trading down on the value chain, switching to cheaper alternatives as living costs rise in the face of generally low-income levels. For consumer goods that are non-essentials, it is only right to believe that there is a limit to the price increases the consumers can take before volumes begin to take a hit.

CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.

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