Naira Decline Sends Ripples Through Economy 

Amidst the naira’s downward spiral, Nigerian economic stability continues to hang in the balance as quoted firms, startups and banks are confronting profound implications which Festus Akanbi examines in this report

The heat unleashed on the Nigerian foreign exchange market took an alarming dimension last week when the nation’s currency experienced its deepest plunge on Tuesday, sinking to a record low of N1,482.57 per dollar following strong demand on the official market, also known as NAFEM.  

This represents 9.03% or N133.95 weaker than N1,348.62 recorded at the close of trading on Monday. The latest development is unprecedented and stands as the lowest point in the historical performance of the naira, as the depreciation exceeded N1,455 quoted on the parallel market.

This means that the parallel market stopped depreciating and sustained the rate it exchanged the previous day at the same N1,460/$1. On Wednesday, the parallel market’s seeming resilience caved in as a dollar was sold for N1,530.

Sadly, the embarrassing situation was recorded in the week when the Central Bank of Nigeria (CBN) announced the repudiation of all verified claims by airlines with an additional $64.44 million to the concerned airlines. 

Companies with Foreign Liabilities in Trouble

While the bookmakers are busy compiling bets on the extent of the danger of the naira fiasco on the overall economy, some capital market operators last week expressed the fear that quoted companies burdened with foreign liabilities or heavily dependent on imported inputs could face a downturn in 2023 dividend payouts to their shareholders.

Their analysis underscores the intricate interplay between foreign exchange dynamics and corporate performance and the contrasting fortunes awaiting companies based on their exposure to foreign liabilities and import dependency.

Their intervention came on the heels of the anxiety of big-time investors and shareholders of the Nigerian quoted companies who might have banked on dividend payments to settle some financial obligations.

In a report by Nairametrics last week, some capital market operators warned that the free fall of the naira arising from the harmonisation of exchange rates may have worsened the mounting pressure on profit margins resulting from the current economic climate.

The argument is that only enterprises boasting substantial net foreign assets or those primarily reliant on local sourcing of inputs, along with products exhibiting elastic demand, may be better equipped to withstand the challenges posed by the depreciation of the Naira.

Sectoral Vulnerability

Analysts said the depreciation of the naira is hurting Nigerian businesses and consumers and that businesses face higher costs for importing raw materials and equipment, while consumers pay more for imported goods and services.

They explained that the surge in the foreign exchange rate has triggered a notable uptick in the cost of production inputs, subsequently driving up the prices of finished goods.

According to the Managing Director of Arthur Steven Asset Management Limited and former President of the Chartered Institute of Stockbrokers (CIS), Mr. Olatunde Amolegbe, with the prevailing foreign exchange (FX) instability, sectoral vulnerabilities are becoming increasingly apparent, with Consumer Goods and Industrial Sector companies poised to bear the brunt of the turmoil.

Amolegbe noted that the erosion of disposable income among consumers could trigger a shift towards product substitution as individuals tighten their belts in response to economic pressures.

He believed that foreign loans face the additional risk of escalated repayment costs unless the loans are denominated internally.

However, observers feared the greatest danger of the current fate of the naira is the threat to startup businesses in the country. Nigeria is said to be Africa’s largest startup ecosystem.

Nigerian startups, which typically raise funds in dollars and earn revenue in naira, say the currency depreciation has led to sharp increases in costs for cloud servers and software, while their incomes remain low in dollar terms.

Rest of World, an online platform in a report published at the beginning of the free fall of the naira last year spoke to eight Nigerian founders who said they were struggling to keep their companies afloat due to the sudden sharp decline in the naira’s value. Investors said the new policy poses a danger to the country’s startup ecosystem, which is largely funded in dollars but generates revenue in naira.

The free-floating rate of the naira has led to a continued depreciation and poses grave dangers to the viability of businesses in Nigeria, Adedayo Amzat, CEO of Lagos-based financial institution Zedcrest Group, said, “The adjustments now formally weaken the reported naira rate, leading to sharp dollar revenue markdowns for naira-earning businesses, and valuation losses from [foreign exchange]-denominated liabilities.” 

Fall in Value of Banks’ Assets

Analysts said already, the current level of the exchange rate is decreasing the value of assets held by Nigerian banks, which can significantly impact their balance sheets, as the value of loans, investments, and other assets denominated in foreign currencies will decline when converted into naira. As a result, banks may face challenges in maintaining their capital adequacy ratios and meeting regulatory requirements.

Given the fact that banks often rely on foreign suppliers for various goods and services, including technology infrastructure, software licences, and equipment, a weaker naira therefore, means that the cost of importing these essential resources will rise, putting additional strain on the banks’ operational expenses.

A Lagos-based financial analyst, Mr. Stephen Ogunsola said: “One of the significant challenges is the potential increase in non-performing loans (NPLs). When borrowers’ incomes decline due to the economic downturn caused by currency devaluation, their ability to service their loans may be compromised. This can result in a higher NPL ratio for banks, affecting their profitability and overall financial stability.” 

According to him, as the value of assets declines and NPLs increase, banks’ balance sheets may weaken, leading to a potential deterioration of their financial health. This can have a ripple effect on the entire financial system, as banks play a crucial role in intermediating funds and maintaining stability.

Meanwhile, as part of the moves to fund FX requests at the official window, the CBN in its latest circular released on Wednesday accused banks of holding excess foreign exchange positions. As a result, the central bank gave lenders until February 1, 2024, to sell off excess dollar positions.

According to officials, the central bank believes some commercial banks hold long-term foreign exchange positions to enable them to profit from the volatile movements of exchange rates. The extent of compliance with this order will be determined this week.

As dollar scarcity continues to push down the value of naira, another set of people at the receiving end are parents of students studying abroad as the current situation has greatly eroded their capacity to fund their children abroad.

An Abuja-based parent, Mr. Ola Badejo complained that the fate of his two children studying in Russia now hangs in the balance because he could no longer send a reasonable amount of money for their upkeep.

However, some Nigerians believe that most of the previous attempts to remedy the situation failed because policymakers have not shown sufficient efforts to patronise locally made products and services which could have conserved the nation’s little foreign reserve.

They believed a nation in dire need of the scarce FX wouldn’t have indulged in the acquisition of foreign goods that could be purchased locally. This was the argument of former Senator of the Federal Republic of Nigeria, Ben Murray-Bruce who noted that rather than purchase Innoson vehicles, our lawmakers went for imported brands, spending scarce petrodollar and we want the Naira to appreciate.

Pointing out the futility of time spent to woo foreign investors to Nigeria, Murray-Bruce said, “I only have to worry. I worry that the foreign investors Tinubu is suffering his masses to pacify are adamant. Look at the data released by the Nigerian stock exchange last week. Look at the huge net outflow in December, notwithstanding that the market returned almost 50% last year. How long will the government continue to weaken the currency to lure investors that remain elusive? If there’s a reverse of the policy now, the economy will be worse off. If the reforms continue, the indicators are that the naira will continue to hit new lows.”