Business in Nigeria
How exchange rate volatility is crippling Nigerian businesses
Story highlight
- The volatility of the naira is introducing significant risks and uncertainties into the business environment in Nigeria.
- This instability makes it difficult for businesses to predict costs and revenues accurately, complicating financial planning and budgeting processes. approach in business dealings.
- Imagine I bought a product at the rate of N700 per dollar and when it’s time to make payment, the exchange rate has risen to N1800 per dollar, isn’t this an obvious frustration?
Globally, stability in any economy is a treasured asset.
However, for businesses operating in or with Nigeria, the reality often feels more like navigating shifting sands.
The naira has become increasingly volatile, introducing significant risks and uncertainties into the business environment.
This volatility impacts everything from pricing strategies to long-term planning, creating a challenging atmosphere for both local enterprises and international investors.
The naira has experienced substantial fluctuations in recent months. Factors such as fluctuating oil prices, inflation, and foreign exchange (forex) market dynamics have all contributed to this volatility.
The Central Bank of Nigeria (CBN) has implemented various measures to stabilize the naira, including forex restrictions and multiple exchange rates, but these efforts have had mixed results.
This instability makes it difficult for businesses to predict costs and revenues accurately, complicating financial planning and budgeting processes.
The unpredictability of the naira’s value undermines domestic and international confidence, leading to a cautious approach to business dealings.
The Chief Executive Officer of the Center for the Promotion of Private Enterprise, Dr. Muda Yusuf, speaking with Nairarmetrics, said the unstable naira creates a lot of uncertainty for businesses.
“One of the worst things that businesses detest is uncertainty because they need some level of certainty to be able to plan what they are doing – your investment, your invoicing, and your contract terms, all of which require some level of certainty in the business environment. So, it’s a major disruptive factor for businesses and for investment across all sectors. It’s also affecting pricing.
“How do you price your product when things are moving this way? So, we think the CBN should be able to come up with a framework. For some of these things, we need to be creative about how to do them. You cannot just leave the currency to be completely floating. I don’t think it’s done anywhere. You should have a framework; you should have a threshold within which you can allow some minimum fluctuation. I think that is something we need to do going forward. It’s not good for business at all.
“Unfortunately, this is also being transferred to the trade sector. Because it is this same rate that is now being used for the computation of import duties. So if you’re importing anything right now, you’re not sure how much it’s going to cost you to clear it until the goods come based on the prevailing exchange rate.
“So how can you have any plan in such a situation? We have people in the real estate industry who cannot conveniently prepare a bill of quantity because prices keep changing. So that volatility is not good for the economy, and I think it’s something that is increasing the risk of doing business. So it’s not good for investment at all,” he said.
Also speaking, Dr. David Itsibor, an analyst at CashLinks, said, “The unstable and frequent changes in the exchange rate of the naira against other international currencies have significantly impacted businesses in Nigeria, and obviously, this impact isn’t a positive one, as it has left business owners in a constant lamenting situation, particularly in the manufacturing sector,” he said.
He noted that for businesses that rely on imported goods and raw materials, currency volatility directly affects cost structures. “When the naira depreciates, the cost of imports rises, squeezing profit margins. Companies are often forced to adjust their pricing strategies frequently to keep up with currency movements, leading to price instability for consumers and potential loss of market share,” he said.
Itsibor said the uncertainty surrounding the naira’s value makes long-term investment decisions more complex, adding that investors, both local and foreign, are wary of committing substantial resources in an environment where currency depreciation could erode returns. “This hesitancy affects sectors that require significant capital outlay, such as manufacturing, real estate, and infrastructure development, said Itsibor.
He added that businesses that must repatriate profits or pay for imports face challenges in accessing foreign currency. He stressed that the scarcity of forex and the multiple exchange rate regime creates a layer of complexity and risk.
A financial economist at Auchi Polytechnic, Zakari Mohammed, also speaking, said currency volatility complicates financial planning and debt management. He cited that companies with foreign-denominated debt are particularly vulnerable.
He said the depreciating naira increases the local currency value of their debt obligations, straining cash flows and potentially leading to financial distress. “This scenario discourages businesses from taking on foreign debt, limiting access to potentially beneficial financing options.
“Furthermore, the volatility undermines Nigeria’s attractiveness as a destination for foreign direct investment (FDI). Investors seek stability and predictability, and the erratic performance of the naira raises concerns about the potential returns on investment. As a result, Nigeria may lose out to more stable economies, affecting job creation, technology transfer, and overall economic development,” he stated.
Buttressing the points, the managing director/CEO, FAE Ltd, and Vice-President, Lagos Chamber of Commerce and Industry (LCCI), Princess Funlayo Bakare Okeowo, stated that many manufacturers in the country rely on imported raw materials and components to stay afloat.
She said a depreciating naira makes these imports more expensive, leading to higher production costs. “This can squeeze profit margins or force companies to increase prices, which may reduce demand for their products. Even the unstable exchange rate is worse. Imagine I bought a product at the rate of N700 per dollar and when it’s time to make payment, the exchange rate has risen to N1800 per dollar, isn’t this an obvious frustration?
“The higher cost of imported goods due to a weaker naira contributes to inflation. Manufacturers face increased expenses not only for raw materials but also for imported machinery and spare parts. This inflationary environment makes it challenging to maintain stable pricing, further complicating business operations,” she stated.
Bakare-Okeowo further stated, “Frequent exchange rate fluctuations create an unpredictable business environment. Manufacturers struggle to plan long-term investments, pricing strategies, and budgeting. This uncertainty can deter investment and expansion efforts.
“While a weaker naira can make Nigerian goods more competitive internationally, the benefits are often offset by the higher cost of imported inputs. Additionally, the volatility makes it hard for exporters to price their goods competitively and predictably.
“Exchange rate volatility can disrupt supply chains, as businesses face delays and increased costs in sourcing materials. This can lead to production halts and missed deadlines,” she said.
