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  • Robert Hayward

Navigating the Shift in Nigeria's Currency Regime

Updated: Oct 13, 2023

The mid-2023 decision to unpeg the Nigerian Naira from the US dollar resulted in a notable 30% drop in its value. This blog aims to shed light on the potential repercussions of this move and suggests strategies to navigate this evolving economic landscape.

To recap, following President Bola Tinubu's assumption of office on May 29, Nigeria swiftly initiated economic reforms to revive its economy. These included scrapping costly petrol subsidies and easing foreign currency market restrictions, which subsequently drove the official exchange rate to unprecedented lows.

The decision to unpeg the Naira from the US dollar indicates a shift toward a more market-driven exchange rate regime, allowing the currency's value to be influenced by supply and demand dynamics. It is a step aimed at alleviating the foreign currency shortage that has stifled growth in Africa's largest economy.

While Nigeria has previously unpegged its currency, this time, external factors such as shifting parallel markets, crypto-enabled remittance, and the challenges of an oil economy unable to meet its own demand have played significant roles in exacerbating uncertainties.

Potential Implications

In this new era, it is imperative for Treasurers and Financial Controllers to consider the following implications for their businesses:

Exchange Rate Volatility: Without the fixed peg to the US dollar, the Naira's value is now subject to fluctuation based on market dynamics. This volatility may affect financial planning, forecasting, and hedging strategies, necessitating close monitoring of currency movements and their potential impact on financials.

Pricing and Cost Adjustments: With Naira value adjustments, businesses must review pricing strategies for imported goods and services. A depreciating Naira could lead to higher import costs, impacting profit margins. Evaluating the need to renegotiate contracts or explore alternative suppliers becomes critical.

Inflationary Pressures: Currency depreciation resulting from the unpegging could trigger higher inflation, requiring a reassessment of pricing structures and negotiations with suppliers to mitigate cost increases.

Risk Management: In this evolved exchange rate environment, effective risk management is crucial. Regularly reviewing and adjusting risk management policies and hedging strategies can help mitigate potential losses arising from currency fluctuations.

Strategic Approaches

To effectively navigate this evolving landscape, businesses should consider implementing the following strategies:

Monitor Currency Markets: Stay informed about exchange rate movements, global economic trends, and regulatory changes. Engage with financial institutions and seek expert advice to gain insights into market expectations and associated risks.

Assess Cash Flow Implications: Understand how exchange rate fluctuations might affect cash flow, liquidity, and working capital needs. This analysis will help identify potential gaps and facilitate proactive financial planning.

Review Pricing Structures: Regularly evaluate the impact of currency movements on pricing structures. Adjust pricing strategies to align with changes in import costs and local market dynamics, ensuring competitiveness is maintained.

Collaborate with Financial Institutions: Engage with banking partners to explore hedging instruments and risk management solutions aligned with business objectives. Evaluate options like forward contracts, options, or natural hedging strategies.

Strengthen Relationships: Foster strong relationships with suppliers, customers, and local partners in Nigeria. Open communication lines can help address challenges stemming from currency volatility, encourage collaboration, and identify shared risk management opportunities.

Moving Forward

As Nigeria embarks on economic reforms, a proactive approach from Treasurers and Financial Controllers is essential. By monitoring currency movements, conducting thorough risk assessments, and implementing robust financial strategies, businesses can position themselves for success in this shifting landscape.

Adapting to change presents challenges, but with prudent strategies, companies can transform potential risks into growth opportunities and improved financial performance. Stay informed, maintain agility, and embrace the possibilities presented by Nigeria's evolving economy.

The central bank has expressed its intent to inject foreign exchange into the interbank market to enhance liquidity and reduce a $4 billion backlog of demand, a process expected to take approximately four weeks. Feel free to reach out and discuss the situation with us. We're here to assist you in your planning.


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