According to PwC’s August Economic Outlook, a rapid depreciation of the naira and the ensuing rise in the cost of imports may drive many domestic businesses to expand their reliance on locally produced inputs.
Recall that in June, the Central Bank of Nigeria (CBN) adopted a more liberal approach to managing foreign exchange, ending the previously artificial naira value and leading to a significant adjustment in the value of the naira relative to its peers on the official market. As a result, the value of the local currency dropped by nearly 40% overnight.
According to the research, which was published by PwC Nigeria, the adverse effect “provides incentives to corporates to explore local sourcing or backward integration in the medium term”.
The research makes the case that, in the long run, the liberalization of the FX market may progressively draw in international investments and increase capital inflows. However, it predicts that short-term investors will most likely take a wait-and-see attitude.
“This may be a result of the absence of further reforms to strengthen business and economic fundamentals,” it notes.
Additionally, it anticipates the likelihood of a general freeze on recruiting plans as businesses look for innovative methods to reduce expenses.
The withdrawal of gasoline sbsidies and the liberalization of the foreign exchange market have increased the ongoing inflationary pressure, which is another worry raised by the report.
According to the challenge, real rates of return on investment and disposable income will likely decline, which will continue to have a significant impact on non-discretionary spending.
In response to the tighter financial environment, it notes that while the cost of borrowing in the naira will continue to be high, the financing costs for businesses will rise as a result of “higher interest payments incurred on exposure to foreign currency-denominated loans.”
According to The Guardian, seven listed Nigerian firms suffered losses totaling N624 billion in the first half of the year as a result of their provisions for foreign exchange losses.
Overall, the paper argues that local businesses are facing difficult times and will need to employ innovative survival methods to weather the storm.
“To achieve customer growth optimization, corporate organizations should implement the following strategies: adjust pricing and pack architecture using revenue growth management (RGM) analysis to cater to shifting consumer habits, adapt products to accommodate changing demand dynamics by substituting expensive raw materials, leverage post-event analytics for promotion decision-making, renegotiate contracts for better terms and expand distribution through discounters and online platforms to align with evolving consumer buying patterns.”
“To optimise costs across value chains, companies should conduct thorough analyses across the value chain. For overhead costs, they should examine benefits versus pay and consider greater segmentation of reward, implement a hiring freeze and improve visibility of non-payroll expenses,” the report read.
Additionally, it suggests choosing alternate sourcing sites to reduce risk and expense, coordinate procurement across organizational divisions, and maximize spending through local and international deals.
