Can Benefits of Weaker Naira Be Sustained Amid Export Spike?

Mudiaga Aluya

Nigeria’s leading manufacturers experienced significant boost in export sales in the first quarter of 2024, largely due to the depreciation of the naira. According to a recent BusinessDay report, financial reports from major companies like Unilever Nigeria Plc, Nestlé Nigeria Plc, Okomu Oil Palm Plc, and Dangote Cement Plc indicated that their combined export revenue surged by 201.1 percent to N387.2 billion, marking the highest increase in almost a decade.

This is a notable rise from N128.6 billion in the same period of 2023. The devaluation of the naira indeed created opportunities, but it also brings challenges, illustrating a complex picture for manufacturing exporters.

One of the advantages of a weaker currency is export competitiveness. The view that devaluing a currency can make a country’s goods cheaper relative to those from other countries, thereby increasing their attractiveness in international markets, might be true.

This is evident in the substantial growth in exports reported by Nigerian manufacturers. For example, Nestlé’s export revenue skyrocketed by 275 percent, indicating how the devaluation has made their products more competitive abroad.

Another significant benefit is the ability to earn more from exports, which can be used to obtain the foreign exchange necessary for production. This has been a crucial development for manufacturers who rely on importing raw materials and other inputs.

However, it is worthy to note that the devaluation was not a deliberate policy to boost exports and that increased export volumes were naturally unintended consequences of the policy.

It has led to regional trade opportunities. The devaluation has also made Nigerian goods more affordable in neighboring West African countries, where the West Africa CFA franc has appreciated against the naira. This has provided a unique opportunity for Nigerian manufacturers to expand their market presence regionally. Companies like Dangote Cement have capitalised on this, dispatching numerous shipments to Ghana and Cameroon, which contributed to their impressive export growth.

Despite the benefits, there are challenges posed by weaker naira. One of such is the rising production costs. The depreciation of the naira has led to increased production costs for manufacturers. Many raw materials and inputs are imported, and with the naira losing value, these imports become more expensive. While exporters benefit from earning more naira, the overall cost of production has escalated, putting pressure on their profitability.

Moreover, not all manufacturers can equally benefit from the devaluation. Only a few manufacturers who can export have seen significant gains. For many others, especially those heavily reliant on imported raw materials, the devaluation has resulted in severe financial strain. This is made worse by the high import duty, as FX is now close to N1,500 per dollar on the Nigeria Customs Service (NCS) platform. This has added to their woes, reducing their competitiveness both domestically and internationally.

Some argue that the weaker naira can help diversify Nigeria’s export base beyond oil, promoting industrial growth. However, the increase in export revenue primarily benefits large, well-established companies with the capacity to navigate the complexities of international trade. Smaller manufacturers, lacking the same resources, might struggle to achieve similar gains.

Also, the devaluation has increased exports contributing to a positive trade balance, as reported by the National Bureau of Statistics (NBS) in her 2023 trade report. However, the broader economic implications of a weaker currency cannot be ignored. Persistent depreciation can lead to economic instability, discouraging foreign investment and leading to higher borrowing costs for the government and businesses.

The surge in exports of fast-moving consumer goods (FMCGs) illustrates how devaluation can enhance comparative advantage. For instance, Nigerian-produced goods have become more competitive in West African markets, leading to increased cross-border trade. However, similar scenarios in other countries show mixed results. In countries like Argentina and Venezuela, currency devaluation initially boosted exports but eventually led to hyperinflation and economic turmoil, underscoring the delicate balance required.

For a sustainable export spike, effective policy interventions are crucial. For instance, China has historically managed its currency to boost exports while simultaneously investing in infrastructure and industrial capacity to support sustained growth. Nigeria, too, can benefit from such a holistic approach, combining devaluation with targeted support for key sectors.

To truly harness the benefits of a weaker naira, the Nigerian government needs to engage directly with manufacturers and exporters to identify critical interventions.  Measures such as ensuring the availability of foreign exchange, providing single-digit loans, and implementing export expansion grants can help manufacturers remain competitive despite higher production costs.

To tame the rising production cost, the government must invest in renewable energy by providing incentives and subsidies for manufacturers to adopt renewable energy solutions. This not only reduces energy costs but also enhances energy security and sustainability. Additionally, local sourcing of raw materials should be encouraged. This can be done by developing policies to boost local agriculture and mining sectors to supply raw materials for manufacturing. This can include tax breaks, grants for research and development, and infrastructure support to facilitate the growth of these sectors.

To leverage the benefits of a weaker naira, the government should as a matter of urgency, enhance its trade agreements and regional integration efforts. Strengthened trade relationships can help create stable and diversified markets for Nigerian products, reducing the risks associated with dependency on a few export destinations.

This can be achieved by actively pursuing and strengthening bilateral and multilateral trade agreements, particularly within the African Continental Free Trade Area (AfCFTA), to secure favourable terms for Nigerian exports.

Also, there should be increased regional integration initiatives. Invest in regional infrastructure projects such as transportation and logistics networks to improve trade connectivity within West Africa and beyond. This will facilitate smoother and more cost-effective cross-border trade.

The weaker naira has undeniably created significant opportunities for Nigerian manufacturers, particularly in terms of boosting export revenues and enhancing competitiveness in regional markets. However, these benefits are counterbalanced by rising production costs, inflationary pressures, and the selective nature of the gains.

For a sustainable and inclusive export growth strategy, the Nigerian government must address the broader economic challenges and create a more supportive environment for all manufacturers. By reducing logistical barriers, improving the quality of products, lowering the cost of doing business, and strengthening trade agreements, Nigeria can better leverage the advantages of a weaker currency and drive long-term economic growth.

Aluya is a public policy analyst and the Research and Advocacy Officer at the Chartered Institute of Directors.