Understanding The Impact of Naira Devaluation on Nigerian Businesses

The Nigerian naira has been following a downward trend in value, which has been raising many concerns lately.
Many have attributed the current high cost of living to this gradual naira devaluation. For example, when you ask the average market woman why the pepper you bought yesterday for #100 is now worth #150 today, the quick anthem answer is that the dollar is rising. But how exactly does this naira devaluation affect goods and businesses in Nigeria?

This article will explain what naira devaluation means, why it’s happening, and how it impacts Nigerian businesses. We’ll also discuss its impact on consumer spending and possible ways to mitigate the impact.

Table of Contents

The Naira Devaluation

Simply put, naira devaluation means the reduction in the value of the naira when compared or exchanged for another country’s currency. In this case, the reference currency is usually the American dollar, the global reserve currency.

Today, one American dollar is worth over 1600 naira. As ridiculous as this may sound, there was a time when the naira was equivalent to the dollar in value. Infact, the naira was somewhat stable in value from 1960, shortly after independence, until the early 1980s. Since then, the naira devaluation history has shown a pattern of fluctuations in its value against other currencies. In fact, no one would have predicted the naira’s current all-time-low valuation, especially given the 1970 oil bloom, which initiated a rapid appreciation of the naira value.

Causes of Naira Devaluation

The question now is, why did the naira lose value, and why is it still losing value today? Here are four primary reasons why the naira depreciates:

Trade imbalances

Simply put, there’s trade imbalance if a country imports more than it exports. A high import rate means that there will be a high demand for foreign currency to pay for imported goods and services. Conversely, less export means lower demand for local currency (the naira), which equals lesser value.

Read also: How to Boost Infra-African Trade

Low foreign reserves

To aid international trade, meet international obligations, and stabilize the nation’s currency in case of depreciation, the Central Bank keeps a foreign currency reserve, usually the dollar. For a country like Nigeria, whose foreign reserves have been experiencing a decline, the central bank’s power becomes limited in a situation of currency devaluation.

One significant implication of this is that it scares foreign investors away. It makes it difficult for foreign investors to invest in or outrightly move their investments out of the nation. When this happens, there’s a reduction in the demand for naira, which reduces its value.

Declining foreign exchange supply

A decline in foreign exchange supply means a reduction in the supply of foreign currency in the country’s economy. The reasons for this decline are not far-fetched, including low and declining foreign investments, depleting foreign reserves, and reduced export earnings.

Since there’s a reduced supply of foreign currencies like the dollar, and the country still has a massive demand for it because of its vast dependence on importation, there’s a need to exchange more naira for it, which further contributes to the ongoing devaluation of naira.

Net forex inflow

According to the National Bureau of Statistics, the Nigerian Net Forex inflow (NFI) has been on the decline since 2019. This means that the amount of foreign currency flowing into the country is less than the amount flowing out. This again creates the problem of high demand and low supply, which affects value.

Weak economic growth

Low GDP growth, inflation, declining investments, budget deficits, high unemployment rates, etc, characterize weak economic growth. A weak economy directly translates to a reduction in foreign investments, a reduction in investor confidence, trade imbalances, etc. These factors put pressure on the Naira, causing it to fall in value.

Read also: 7 Financial Plans to Make Towards Productivity in 2024.

Impact of Naira Devaluation on Nigerian Businesses

Naira devaluation, is it good or bad? How exactly does it affect businesses in Nigeria?

The widespread consensus is that this devaluation of the naira adversely affects Nigerian businesses. However, this is only partially true.

The devaluation of naira can have both positive and negative effects. It simply depends on the nature and type of business.

Impact of naira devaluation on import-dependent businesses

The automobile, electronics, pharmaceutical, construction, retail, and other import-dependent businesses are usually on the negative side of naira devaluation. This is because when the value of the naira falls, it loses purchasing power in the international market. As a result, import-dependent businesses now have to pay more when buying goods, raw materials, or equipment from international markets.

This increased importation cost negatively impacts import-dependent businesses’ profitability and market competitiveness. It increases the cost of production and reduces profit margins.

This devaluation of naira also poses financial challenges for businesses. For example, if a business has loans or contracts in foreign currency and the naira value drops, paying back those loans or fulfilling these contracts becomes harder.

This strains finances because the business now needs more naira to cover the same foreign currency. As a result, they may have to increase prices for goods and services, which affects consumers too.

Read also: Import and Export Regulations in Nigeria: A Guide for Business Owners

Impact of naira devaluation on export-oriented businesses

As strange as it may sound, the naira devaluation generally benefits export-oriented businesses in Nigeria. Local manufacturing businesses, agricultural businesses, the oil industry, a primary national revenue source, and many other export-oriented businesses all benefit from the naira devaluation.

The low naira value means exported goods are now more affordable for international buyers, which boosts competitiveness in the international market, as foreign businesses or traders now prefer to buy from the Nigerian market. This leads to more sales volume and potentially higher profits.

Impact of naira devaluation on small and medium enterprises (SMEs)

Although small and medium enterprises generally operate within Nigeria, they are also affected by the naira devaluation. Due to devaluation, SMEs that rely on imported raw materials, equipment, or finished goods face higher costs.

This can disrupt their supply chain, increase their cost of production, and reduce their profit margins. On the flip side, small businesses that make locally produced goods for local consumption or export will generally be on the good side of this naira devaluation.

However, currency devaluation generally causes inflation, especially in an import-dependent country like Nigeria. Inflation reduces the actual value of money, which means customers now have to spend more on fewer goods and services. This significantly reduces the purchasing power of consumers if their earnings do not increase.

Businesses that sell local goods and services that do not in any way relate to importation are also affected by inflation. They face higher expenses for housing, transportation, utilities, healthcare, education, and other necessities. Therefore, to raise their purchasing power and profit, they also increase the prices of their goods and services. So, it’s not entirely wrong when a pepper seller blames the rising dollar for higher prices.

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Strategies for Mitigating the Impact of Naira Devaluation

Here are four valuable strategies that businesses can employ to mitigate the impact of the devaluation of Naira:

Diversify suppliers: Businesses who rely on imported goods can consider local sources or other alternatives.
Hedging against currency devaluation: With the ⁠significant naira devaluation 2024 trend, businesses need to take proactive measures to protect themselves against currency fluctuations. For example, using forward contracts to lock in an exchange rate for business deals can protect against future Naira depreciation.
Price adjustments: Although price adjustment may affect customers, it has to be done. However, prices should only be adjusted to reflect increased costs, not aggressively, to avoid losing customers.
Invest in productivity and innovation: By enhancing productivity through innovation, businesses can improve efficiency and cut operational costs.

Read also: 10 Ways to Safeguard Your Nigerian Business From The Effects of Inflation

Conclusion

The devaluation of naira negatively impacts import-dependent businesses. On the other hand, it benefits export-oriented businesses. However, it often leads to inflation, especially in an import-dependent country like Nigeria, reducing purchasing power, increasing the cost of living, and negatively impacting economic growth.

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Edited by Oluwanifemi Akintomide.

About Author

Inioluwa Olutayo: Olutayo Inioluwa Emmanuel is a versatile, creative, results-oriented content writer with over five years of experience. He excels in creating engaging short-form and long-form content, blending creativity with strong research skills. Adding to his strengths, Olutayo strategically employs SEO best practices to enhance visibility and engagement.