As Businesses Groan Under Weight Of Naira Devaluation

The devaluation of the naira has significant impact on the operations of multinational companies operating in the country.

The naira devaluation led to increase in operating costs for multinationals whose major costs including finance costs are denominated in foreign currencies.

On 14 June 2023, the Central Bank of Nigeria (CBN) announced changes in the Nigerian forex operations which required the immediate collapse of all segments of the market into the investor and exporter (I&E) window and reintroduced the ‘willing buyer, willing seller’ model. This led to an approximately 60 per cent movement in the exchange rate, since the announcement, to N756.24/US$ at the end of June 2023 as the market seeks an equilibrium level.

For example, Nestle Nigeria Plc reported a pre-tax loss of N86.5 billion in the second quarter of the year ended June 30, 2023. The losses contributed to wiping its Q1 profits, taking its half-year profits to N61.6 billion, one of the worst performance in years. Nestle Nigeria’s losses are mainly due to a forex loss of N123.7 billion which impacted its profits.

MTN Nigeria Q2 results showed pre-tax profits drop of 64 per cent to N44.6 billion. Like most companies in Nigeria, MTN also suffered a foreign exchange loss of N131.4 billion which dragged profits down.

Nigeria Breweries in Q2 reported a pre-tax loss N50.2 billion, while Guinness Nigeria in its full year results recorded a loss after tax N18.1 billion.

For many businesses, the naira’s fall has been a heavy burden on their operations.

Speaking on the H1 performance, the managing director/CEO of Nestle Nigeria, Mr. Wassim Elhusseini, “our profit after tax was, however, negatively impacted by the recent devaluation of the naira, which necessitated the revaluation of our foreign currency obligations.

“Going into the second half of the year, we will continue to focus on optimising our operations to ensure the availability and accessibility of the nutritious food and beverages our loyal customers expect from us.”

Also, the managing director of Cadbury Nigeria, Oyeyimika Adeboye, noted that, businesses operating in Nigeria continued to face tough challenges, with rising inflation and devaluation, leading to higher manufacturing and operational cost.

According to him, despite recording an operating profit of N6.072 billion, this performance was significantly impacted by the recent devaluation of the naira. We shall continue to remain resilient and innovative to navigate the challenging operating environment.

On his part, the chief executive officer of Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf said, Naira devaluation has been a perennial problem for companies that are highly import-dependent.

“The multinationals that are dependent on imported raw materials will be most affected by the naira devaluation, which has been a problem for companies that are highly import-dependent,” Yusuf said.

He said the rising benchmark interest rate is affecting the finance costs of firms including multinationals, saying, ‚the unification of the exchange rate will make multinationals have better access to FX, which will be good for them.‘

Analysts at Cordros Securities Limited recently said: “the major implication of the naira devaluation on multinational companies is an expectant increase in finance cost due to higher cost of borrowings.

“As a result of naira devaluation, all costs of operations will be high for these multinational companies as finance cost, input cost and operating expenses will be affected.”

The director-general of Manufacturers Association of Nigeria (MAN), Segun Ajayi-Kadir said that the recent floating of the naira, which has led to its devaluation, would increase raw materials import costs and reduce import flows.

He noted that floatation could lead to exchange rate volatility and difficulty predicting future exchange rate movements, which would make planning challenging.

Despite these challenges, MAN expressed optimism that floating the naira remained an important step towards resolving the crisis rocking Nigeria’s forex market, especially given the fact that the official exchange rate was almost at par with the market-determined rate.

The Association said: “We would like to stress that foreign exchange scarcity has been a hindrance to the manufacturing sector. While getting the forex at the official rate has been quite difficult, members who struggle to get it through alternative means do so at an exorbitant and uncompetitive rate.

“Given a floating system, we are optimistic that the official and parallel market rates will eventually converge and will create headroom for investors to seamlessly have access to forex at a competitive rate.”