Multinational companies in Nigeria are expected to face increased finance costs as a result of the recent devaluation of the naira, according to Tesleemah Lateef, a banking analyst at Cordros Securities Limited. Lateef highlighted that the devaluation would affect all aspects of operations, including finance costs, input costs, and operating expenses.
The Central Bank of Nigeria (CBN) has allowed banks to freely set market rates for the sale of foreign exchange, leading to the unification of the exchange rate. As of Thursday, the weighted average rate at the Investors' & Exporters' FX window stood at N753 per dollar. This move has been welcomed by investors.
Muda Yusuf, the CEO of the Centre for the Promotion of Private Enterprise, noted that naira devaluation has been a persistent problem for import-dependent companies, particularly multinationals relying on imported raw materials. Yusuf expressed optimism that the exchange rate unification would improve access to foreign exchange for these companies.
Analysts at CSL Stockbrokers Limited highlighted that the unification of the exchange rate would increase production costs for companies importing raw materials. This, in turn, would likely result in price increases being passed on to consumers, especially for imported goods. They also pointed out that changes in the exchange rate have a strong pass-through effect on consumer prices, compounding the impact on consumers already grappling with the removal of fuel subsidies.
The financial statements of Nestle Nigeria revealed a significant increase in finance costs. In the first quarter of 2023, the company's finance cost amounted to N5.34 billion, marking a 125.3 percent surge compared to the same period in 2022. Nestle Nigeria's annual report for 2022 showed a substantial rise in unsecured bank loans and loans from related parties. Additionally, a loan of $100 million approved by Nestle S.A. in April 2020 had been drawn down as of December 31, 2022.
Cadbury Nigeria and Unilever Nigeria also experienced a surge in finance costs. Cadbury Nigeria's finance cost doubled to N194 million in Q1 2023 from N96.71 million in the same period the previous year. Meanwhile, Unilever Nigeria witnessed an 89.6 percent increase in finance costs, reaching N183.38 million in Q1 2023 from N284.06 million in Q1 2022.
Cadbury Nigeria emphasized the need for a unified exchange rate in Nigeria to reduce the cost of raw materials and create a level playing field for companies operating in Africa's largest economy. The company's finance chief highlighted the challenges faced in obtaining foreign currency at the official naira-dollar exchange rate, leading to the utilization of more expensive sources of hard currency for imports such as milk and sugar.
Overall, the naira devaluation and the unification of the exchange rate are expected to have significant implications for multinational companies in Nigeria, leading to higher finance costs and increased production expenses that may be passed on to consumers.
