Nigeria, a country known for its thriving tech ecosystem and the growing number of startups, is currently facing a major challenge. The government’s recent removal of fuel subsidy has resulted in soaring fuel prices from the official pump price of $0.40 (185 naira) to $1.18 (550 naira) exacerbating the already high inflation rate of 22%.
In the 1970s, the Nigerian government introduced oil subsidies to mitigate the effects of rising global oil prices. The military regime of Olusegun Obasanjo formalised the subsidy in 1977 when it passed the Price Control Act, which regulated the prices of goods such as fuel. The initiative has gradually become a heavy burden to the government as the cost of maintaining the subsidy increased over the years. The newly inaugurated President Bola Tinubu’s administration’s decision to end what many have described as an “organized crime” subsidy regime on May 29, 2023, will have far-reaching economic consequences, particularly for tech startups and workers in the country.
The situation is especially difficult because the government has yet to implement any measures to mitigate the impact and absorb any negative shocks to the economy and citizens. However, aside from the mobility and logistics sectors, which appear to be the hardest hit by the policy, the overall tech startup ecosystem in the country will be impacted, particularly those bootstrapping and struggling to raise funding, and even established startups who have been struggling to survive the recent economic climate.
The Possible Effects on Tech Startups
Nigerian tech startups, known for their innovation and resilience, are now facing an additional challenge. The operational costs of these startups are set to skyrocket as the cost of fuel triples. Due to the unreliability of the electricity grid, startups frequently rely on generators as backup power sources. Fuel price increases will increase overhead costs, putting a strain on the limited resources of these startups.
Second, rising fuel costs and subsequent increases in transportation costs can hurt talent acquisition and retention for tech startups. Commuting to work will become more expensive, particularly for those who live a long distance away from their workplace. This may deter potential employees from considering job opportunities at startups, and it may even prompt current employees to seek alternative employment opportunities closer to their homes. As a result, startups may have difficulty attracting and retaining skilled talent, limiting their growth potential.
Furthermore, the COVID-19 pandemic forced the tech industry to embrace remote work practices. However, because of the erratic power supply, many tech workers rely heavily on fuel-powered generators to ensure continuous productivity. Fuel price increases occasioned by the removal of fuel subsidy will make it economically difficult for remote workers to continue using generators, limiting their ability to work efficiently. This disruption could reduce overall productivity and harm the growth of tech startups.
Moreover, tech startups often depend on outside funding to accelerate their growth. The increase in operational costs caused by the fuel price increase may force startups to redirect their limited resources toward day-to-day operations. This detour could limit their ability to secure critical investments and stymie their growth potential. Due to the uncertain economic environment, investors may be hesitant to fund Nigerian startups, resulting in a decrease in available capital for the industry as a whole.
Innovation and Adaptation to Mitigate the Effects of Removal of Fuel Subsidy
Despite the challenges, Nigerian tech startups have demonstrated adaptability and resilience. The increase in fuel prices will encourage innovation and the development of energy-efficient technologies. Startups will most likely seek out sustainable alternatives to traditional generators, such as solar power. This shift toward renewable energy solutions not only aligns with global sustainability goals but also allows startups to differentiate themselves and attract environmentally conscious investors. This crisis provides an opportunity for startups to rethink their strategies, collaborate with relevant stakeholders, and develop innovative solutions to address rising fuel and electricity costs.
Faced with rising costs, tech startups can look into collaborations and resource-sharing initiatives. Pooling resources and sharing transportation and energy costs can help individual startups reduce their financial burden. Collaborative workspaces, co-working arrangements, and shared generator facilities can help startups save money while also cultivating a sense of community within the tech ecosystem.
Timely Government Intervention
To mitigate the negative effects of the fuel price increase on the tech startup ecosystem, the Nigerian government must intervene and provide policy support. The government may consider providing tax breaks or grants to startups working on clean energy solutions. Fostering collaborations between startups and established energy companies can also drive innovation in the renewable energy sector. Providing a stable and affordable power supply infrastructure will also aid in the growth of the tech startup ecosystem.
As startups face financial constraints, it is critical to prioritize upskilling existing talent over hiring new employees. Startups can improve their employees’ capabilities and stay competitive in the industry by investing in their workforce’s professional development. This strategy not only lowers recruitment costs but also cultivates a loyal and dedicated workforce, resulting in increased productivity and innovation.
The removal of fuel subsidies in Nigeria has created a slew of new challenges for both tech startups and workers. Rising fuel prices, combined with high inflation rates and an unreliable power supply, have increased the financial burden on startups and made employee commuting more expensive. This crisis, however, provides an opportunity for innovation and adaptation within the tech startup ecosystem. Startups and workers can navigate this challenging landscape and emerge stronger by seeking sustainable energy solutions, collaborating with relevant stakeholders, and receiving policy support from the government. This will contribute to the growth and development of the Nigerian tech industry.