The devaluation of the naira is expected to have a significant impact on the borrowing and input costs of multinational companies operating in Nigeria, according to BusinessDay’s analysis and experts.
They say naira devaluation may lead to increased operating costs for multinationals whose major costs including finance costs are denominated in foreign currencies.
“The major implication of the naira devaluation on multinational companies is an expectant increase in finance cost due to higher cost of borrowings,” Tesleemah Lateef, banking analyst at Cordros Securities Limited, said.
“As a result of naira devaluation, all costs of operations will be high for these multinational companies as finance cost, input cost and operating expenses will be affected,” Lateef added.
The Central Bank of Nigeria (CBN) put the weighted average rate at the Investors’ & Exporters’ FX window at N753 per dollar as of Thursday. The apex bank recently scrapped its currency peg and allowed banks to freely set market rates for the sale of foreign exchange, and investors cheered the exchange rate unification move.
Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise, said naira devaluation has been a perennial problem for companies that are highly import-dependent.
“The multinationals that are dependent on imported raw materials will be most affected by the naira devaluation, which has been a problem for companies that are highly import-dependent,” Yusuf said.
He said the rising benchmark interest rate is affecting the finance costs of firms including multinationals.
“The unification of the exchange rate will make multinationals have better access to FX, which will be good for them,” Yusuf said.
Analysts at CSL Stockbrokers Limited said the unification of exchange rate will increase the cost of production for companies that import raw materials and that they will be forced to pass on the increase to the final consumer.
They said: “Importers of eligible items at the I&E window will now have to source FX at a higher rate and will likely push the associated increased costs to the end consumers resulting in an increase in the price of goods and services, especially imported goods.
“Consumers still processing the impact of the removal of fuel subsidies will now have to deal with an additional increase in prices of goods and services associated with a depreciation of the currency. Empirical evidence shows a strong pass-through effect of changes in the exchange rate on consumer prices.”
Nestle Nigeria’s finance cost was N5.34 billion in the first quarter of 2023, up 125.3 percent from N2.37 billion in the same period of 2022, according to its unaudited financial statements.
The company said in its 2022 annual report that its unsecured bank loans stood at N8.29 billion as at December 2022, up from N431.94 million in 2021, while loans from related parties rose to N147.01 billion from N76.43 billion.
It said a loan of $100 million approved for the company by Nestle S.A. in April 2020 was drawn down as at December 31, 2022.
“The loan has tenor of seven years inclusive of moratorium period of two years on interest payment only commencing from April 2020. The facility, which is unsecured, attracts interest at three months USD Libor plus a margin of 1134 basis points. There is no fixed payment period agreed in the loan contract. Payment is to be made subject to availability of FX,” Nestle said.
Cadbury Nigeria saw its finance cost double to N194 million in Q1 2023 from N96.71 million in the same period of last year.
Unilever Nigeria’s finance cost jumped 89.6 percent to N183.38 million in Q1 2023 from N284.06 million in Q1 2022.
Cadbury Nigeria Plc told Bloomberg earlier this month that a unified exchange rate in Nigeria was needed to lower the cost of raw materials and level the playing field for companies operating in Africa’s largest economy.
The Lagos-based chocolate maker’s finance chief said the company has been getting only a fraction of the foreign currency it needs for imports like milk and sugar at the official naira-dollar exchange rate set by the Central Bank of Nigeria, forcing it to turn to more expensive sources of hard currency.