Currency volatility is a major problem for foreign businesses in many African economies as it puts them at risk of losses. Two things happen when foreign companies lose confidence in the exchange rate of any market they operate in. They either leave the market or change their business model to suit the prevailing market conditions. Since 2020, following the ease of the COVID-19 lockdowns, many markets around the globe have witnessed either of these disruptive shifts.
For instance, in 2021, South African retail giant, Shoprite, began to restrict capital allocations to its subsidiaries in other African countries to make strategic investments in its home base. The move was triggered by massive losses- linked to the global lockdowns- across its foreign subsidiaries. Citing currency volatility, Shoprite withdrew operations from other African countries to take advantage of its dominance in key segments, grocery and growing food and beverage, in the South African market.
Since the pandemic, high inflation rates and currency volatility – including devaluation – have become the norm for some African economies. We see this in Egypt, Kenya, Ghana, Nigeria, etc. These economic trends are responsible for consumers’ sentiments towards products and services as they tend to prioritise basic needs of cheaper comparative value to luxury and wants.
Earlier this month, the Central Bank of Nigeria implemented a clean float foreign exchange management system, to allow the naira to trade freely against the dollar rather than maintaining a pegged rate. After the CBN announced the new policy, the exchange rate plunged from N477/$1 on June 13 to N750/$1 on June 14. The decision saw a historic fall of the naira against the dollar from N741.21/$1 to N815/$1 on Wednesday, the 21st of June. Since then, the rates have been on a volatile downtrend.
While companies like Unilever Nigeria Plc announced plans, earlier in the year, to exit some market segments due to currency volatility, Nestle Nigeria is reinventing its operations in Africa’s largest economy. Recently, the fast-moving consumer food giant announced plans to increase the sourcing of local raw materials- like starch and turmeric- in its African markets to reduce foreign exchange exposure. Nestle is replacing imported corn starch in Nigeria with cassava starch and has helped seven local suppliers to boost capacity to meet the company’s supply needs, according to Reuters.
A few weeks ago, in March, Unilever Nigeria Plc announced plans to exit from Nigeria’s home care and skin cleansing market segment to reposition its business for sustained profitability- concentrating on higher growth opportunities. The multinational brand has two business segments in Nigeria, food products, and home and personal care segments.
Last year, the company raked in N88.72 billion in revenue. While the food products segment generated N42.6 billion (48 per cent), the home and personal care segment generated N46.09 billion (52 per cent) of the total revenue. But it chooses to leave to strengthen “business operations with measures to digitize and simplify processes, and focusing more on business continuity measures that reduce exposure to devaluation and currency liquidity in our business model,” the company said.
