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Weakening naira dents profits in Nigeria

Recent financial results published by some of Nigeria’s largest publicly traded companies show that a weakening naira is denting profits even as revenues increase.

The naira has shed almost half of its value against the US dollar on official markets since June, when the new administration led by President Tinubu encouraged the central bank to stop maintaining an artificially high exchange rate.

The fall in global oil prices has dented the foreign exchange inflows for the oil-exporting nation, which has also seen a wider drop in foreign direct investment (FDI), with both trends putting pressure on the naira.

Emerging market currencies across Africa have generally trended downwards over the last 12 months or so, with higher interest rates in the US encouraging traders to obtain greater exposure to the greenback at the expense of “riskier” currencies such as the naira.

Profits undermined

While many analysts see this as a necessary part of Tinubu’s wider package of economic reform, the speed at which the naira is depreciating has caused problems for some of the country’s biggest companies.

Last week, one of Nigeria’s largest companies by market capitalisation, MTN Nigeria, released its results for the first half of the year. This showed that revenue accelerated to a record level of N1.2tn (approximately $1.6bn) in the first half of 2023 but that profits dropped by 29% in the same period.

This was largely attributed to significantly higher foreign exchange and financing costs, which soared by over 160%. Higher business costs generally in light of high levels of inflation, which is currently running at about 23% in Nigeria, also dented profits further. The share price of MTN, which is listed on the Nigerian Exchange in Lagos, fell by 5% after the results were announced, before bouncing back at time of writing.

Other major companies in Nigeria have seen similar declines in their profits as a result of the naira’s depreciation. Dangote Cement posted a 14% decline in the second quarter, having reported an exchange rate loss of N103.8bn after Nigeria’s move to a flexible exchange rate regime. Guinness in Nigeria also posted a loss for the same reason. Despite rising revenue in the year ending June 2023, the company reported N49bn in exchange rate losses, leading to an overall loss of N18.1bn.

Weak naira undermines purchasing power

Rume Ophi, a financial analyst based in Lagos, tells African Business that these results show “we have the numbers in Nigeria [in terms of revenues] but our purchasing power is not measurable with the stronger economies of the world.”

As citizens have weaker purchasing power compared to some other markets, in large part thanks to a particularly weak national currency, this means that companies cannot expect to see their profits as high in Nigeria: “Take Dangote for example – if the average Nigerian buys any of their products, you cannot expect their profits to be the same as in South Africa.”

He adds that major companies have suffered under a doubly punitive macroeconomic environment which forces them to import goods using a strong and expensive US dollar, and sell them with a weak and non-competitive Nigerian naira.

The naira continues to hover near all-time lows, which is likely to put further pressure on companies battling challenging foreign exchange conditions.

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