How the naira devaluation impacts Nigerian businesses

The recent 5.5% devaluation of the naira at the SMIS window has raised concerns about the currency risks faced by Nigerian businesses. In a recent TV interview on CNBC Africa, Winston Osuchukwu, the co-founder of Trans-Sahara Incorporated, shared insights on how businesses can navigate these risks in the challenging economic environment of Nigeria. Osuchukwu emphasized the importance of moving towards a market-driven valuation for the currency to mitigate risks and attract investments. Currency risk has always been a significant factor for businesses operating in Nigeria, especially with the central bank's intervention in the foreign exchange market. Osuchukwu highlighted that a market-driven valuation would create a more transparent and stable environment for investors. By reducing government control over the exchange rate, businesses can better manage their financial risks and make informed investment decisions. The Central Bank of Nigeria's strategy regarding currency devaluation has been a topic of discussion, especially in light of potential World Bank loans. Osuchukwu suggested that moving towards a market-driven interest rate aligns with the World Bank's push for open markets and economies. While gradual adjustments are being made, Osuchukwu believes that a market-driven approach will benefit both businesses and the overall economy. The impact of currency devaluation on businesses can be severe, as seen in the case of multi-national companies like MultiChoice threatening to drop rights to popular sports events in Nigeria due to rising costs. Osuchukwu explained that businesses operating in Nigeria often rely on parallel market rates for transactions, reflecting the true value of the currency. This reliance poses challenges for businesses in pricing their products and managing costs effectively. Managing currency risk requires businesses to hedge effectively against fluctuations, especially in a managed exchange rate system. Osuchukwu emphasized the importance of market-driven financial instruments for risk management, which can be costly and complex in a controlled exchange rate environment. The lack of financial instruments tied to market forces makes it challenging for businesses to protect their investments and remain competitive. The economic impact of the COVID-19 pandemic has further strained government revenues and raised concerns about sustaining an artificially inflated currency. Osuchukwu noted that maintaining an overvalued currency during lean times can deplete government resources needed for essential services like healthcare and water infrastructure. He suggested that allowing the currency to adjust to its market value would enable the government to redirect funds towards vital social services, benefiting the economy more broadly. Looking ahead, the monetary policy committee faces a challenging decision on interest rates to balance inflation and economic growth. Osuchukwu acknowledged the dilemma of attracting external investment through higher rates while promoting economic stimulus with lower rates. He advocated for a more accommodative monetary policy to inject liquidity into the economy and support growth prospects. In conclusion, navigating currency risks in Nigeria requires a shift towards market-driven policies, effective risk management strategies, and a focus on sustainable economic practices. Businesses must adapt to the evolving financial landscape and leverage market-based solutions to thrive in a dynamic and competitive market environment.