Local companies like MTN and MultiChoice could see a significant drop in their Nigerian profits following a big devaluation of the Nigerian naira in 2023.
Since the start of the year, the naira has weakened more than 40% against the rand. At the time of writing, the naira is trading at ₦44.48/ZAR and ₦785.59/USD.
RMB’s Matete Thulare told Moneyweb Now that the naira has been devaluing since President Bola Ahmed Tinubu took office in May.
Since Tinubu assumed office, the Central Bank of Nigeria has embarked on several exchange rate reforms. This was done per the President’s election promises of implementing “structural reforms around the exchange rates”.
For years, Nigeria has operated multiple exchange rates for the naira. The Central Bank has dictated the official exchange rate, while a far higher unofficial rate determined the price of imported commodities like wheat, which are priced in dollars.
This multiple exchange rate regime created a major distortion to the workings of the market.
According to AP News, the policy led to trading that exploited the price differences between the two markets at the expense of legitimate economic activities.
“The multiple exchange rates also meant foreign investors had been forced to sell outside currencies to Nigeria’s central bank at the official rate and had been unable to access foreign money amid the country’s severe dollar shortage.”
In addition, Thulare said that, over the last few years, Nigeria has seen an increased number of bureau de changes – businesses that profit by buying foreign currency and then selling the same currency at a higher exchange rate.
“They have been major influences on the naira’s exchange rate against the dollar, as the number of operators has increased from just 74 in 2005 to around 5,600 in 2021,” he said.
This large number of players created a market distortion, leaving the Central Bank of Nigeria with very little influence to tackle the devaluation of the naira.
Therefore, in June, the Nigerian Central Bank allowed the naira to weaken by more than a third in an attempt to unify Nigeria’s multiple exchange rates and to lure foreign investment to shore up liquidity in an economy struggling with dollar shortages.
Now, the exchange rate will be determined by market forces and no longer the central bank, which should boost inflows of money and help stabilize the Nigerian economy.
Thulare said that, following the naira’s devaluation in June, the gap between the naira’s exchange rates on the official window and the black market is narrowing.
Closing this gap was a key demand from the market and institutions like the World Bank.
He said that companies like MTN have been struggling with the backlog of dollars in Nigeria, which has forced some businesses to turn to unofficial sources.
“That’s undermining the Central Bank’s effort to close the gap between the official market and the black market rates,” said Thulare.
Nigeria’s Central Bank has said it would allow the currency to trade freely until it finds a new market-related level.
While this is a positive step forward for the country, it will take time before reaching this level, and a weak currency will fuel inflation, which Nigeria and the rest of the world are already struggling with.
However, Thulare said the Central Bank has been intervening in the market to prevent sharper losses in the currency.