FX Rates Merger and Companies’ Tales of Woes

The initial optimism of the international community on the ongoing reform of Nigeria’s foreign exchange market notwithstanding, financial market analysts including some foreign exchange dealers said the prevailing fx scarcity and the attendant crash in the value of the Naira is hurting large businesses, which are being compelled to run from pillar to post to repay their foreign exchange-denominated loans, reports Festus Akanbi 

Less than three months into the unification of all segments of the forex exchange (FX) market by the Central Bank of Nigeria (CBN), it is a tale of woes from members of the business community. 

Interestingly, unlike the apathy that greeted the prior stance of the CBN, the ongoing reform has been cheered by some foreign and domestic investors. In fact, there are reports that Nigerian stocks and Eurobonds have recorded significant gains due to a boost to investor confidence. 

However, feelers from the business community have shown that the free fall of the value of the naira triggered by the fx market reform is putting the operations of large businesses in jeopardy as they battle to meet their foreign exchange obligations.

Finance market watchers regretted that the business environment usually takes the bashing whenever the government put up any economic policies without a deep thought about the fallouts. It recalled that the implementation of the Treasury Single Account of the President Muhammadu Buhari regime had in the same fashion, created a bureaucratic bottleneck for companies doing business with the government.

As the scarcity of foreign exchange bites harder, analysts said it is not a coincidence that some companies are beginning to make their exit from Nigeria to a safer haven. 

Recently, GlaxoSmithKline (GSK) Consumer Nigeria Plc said it plans to cease operations after evaluating the options for moving to a third-party distribution model for its pharmaceutical products. GSK Nigeria, which has faced increased competition from local companies and imports from India and China, said its half-year sales had dropped to N7.75 billion ($9.82 million), from N14.8 billion in the same period a year ago.

Already, Guinness Nigeria Plc has moved its corporate headquarters from Lagos, Nigeria to Ghana. The development will place Guinness Nigeria in the league of other businesses like Unilever and Dunlop that have left Nigeria for Ghana although the brewery makers explained that it was only moving their headquarters from Lagos and not completely relocating from Nigeria.

The Reforms

In June, the Central Bank of Nigeria (CBN) announced changes in the Nigerian foreign exchange operations which required the immediate collapse of all segments of the market into the Investor & Exporter (I&E) foreign exchange window and reintroduced the ‘willing buyer, willing seller’ model. The decision, as market surveys have shown, has continued to put pressure on the naira, which plunged to a record low of N910/$1 on the parallel market on Wednesday, August 9, 2023, as demand for foreign currency outstripped supply. 

Forex traders were said to have quoted the exchange rate as high as N910/$1 for “inflows” and N895/$1 for cash trades. “Inflows” represent the sale of forex via interbank transfers and are considered more expensive than cash transfers. 

Meanwhile, in the official Investor and Exporter Window, the exchange rate closed at N774.78/$1 while the NAFEX rate was N776. The official market also faces supply constraints, with daily turnover averaging $80 million since July. 

Foreign Currency Liabilities

While the federal government is basking in the euphoria of the growing support for its economic policy, which some bookmakers said will reduce tension in the foreign exchange market, analysts observed that such optimism is not shared in the boardrooms of many of the leading companies which are battling the devastating effects of the spike in the naira-dollar exchange rates on their businesses. The affected companies include those with exposure to foreign exchange-denominated loans although some of these exposures predated the coming on board of the current administration.

The banking sector was not spared as Ecobank Transnational Incorporated reported profit before tax of $29million in the Nigerian market in the first half of 2023 compared with $16million in the first half of 2022, representing a 77 per cent growth. However, its operating expenses in Nigeria rose to $104m in the second quarter, rising by 10 per cent, driven mainly by consumer-price growth, which accelerated following the removal of fuel subsidies and exchange rate reform. Its Chief Executive Officer, Jeremy Awori, specifically fingered weak currencies as one of the factors that impacted the pan-African lender’s figures.

Another financial institution, FBN Holdings, reported N187.24billion as profit in the first half of 2023, marking a 231 per cent increase compared to N56.60billion recorded in 2022. This profit was on the back of interest income and fee and commission income. However, the foreign exchange income trended towards the negative for the financial period as it was N98.42billion in the red.

Companies Scramble for FX

Also cut in the web is Diageo Plc’s Nigeria unit, which lamented that it is struggling to obtain dollars to pay back foreign-currency loans, despite the government’s liberalisation of the foreign-exchange market to help to revive the economy.

Similarly, Guinness Nigeria Plc, a unit of Diageo Plc, has said it is looking for dollars to pay back foreign-currency loans. It declared a loss of N18.2 billion for 2023, compared to N15.7 billion profit in the previous year after its finance costs soared on the currency devaluation. It wants to pay off the loans but can’t at present owing to the dollar shortage, according to the company’s Finance and Strategy Director, Emmanuel Difom. 

“If liquidity improves, we plan to pay off everything we owe on hard currency,” to reduce our vulnerability, he was quoted as saying in a recent report.

It was the same story for MTN Nigeria Communication Plc, Nestle Nigeria Plc, and some other companies which suffered N486.82 billion in foreign exchange losses in half year ended June 30, 2023, about 651 per cent from N64.82billion reported in the half year ended June 30, 2022. 

In the period under review, MTN Nigeria declared N131.45 billion net foreign exchange losses, a growth of 864.5 per cent from N13.63 billion reported in H1 2022. 

Also in this category is Nestle Nigeria, which reported a N123.8 billion net foreign exchange loss in H1 2023 from N2.13 billion in H1 2022. 

Other companies with significant foreign exchange losses in H1 2023 include Dangote Cement Plc, BUA Cement Plc, Nigerian Breweries Plc, Cadbury Nigeria Plc, and Eterna Plc as they declared unimpressive performance in recent years, despite reporting significant revenue increases.

The naira moved from N465 against the dollar at the end of May 2023 to close at N756 against the dollar in June 2023, giving rise to a net exchange loss of these companies from third-party loans and payables in the Nigerian entities.

On its part, Nigerian Breweries Plc reported N85.26 billion net loss on foreign exchange transactions in H1 2023 from N7.28 billion in H1 2022. The multinational breweries company also declared a loss of N47.6 billion in H1 2023 from N18.74 billion in H1 2022.

A global development economist, Kazeem Bello, said the country needed to tread softly with the new directive as it could backfire and create more complex problems. “We cannot handle the dollar market pricing like the petrol pricing. It will have severe dislocation for the market system, especially when there is acute scarcity of the commodity. People familiar with this should advise the government to tread softly. 

“It will inflict pains and unnecessary costs skyrocketing. It may create a serious upset for the economy, especially in the short and medium term,” he added.