Rate Hikes, Naira Devaluation Pummel FMCG Sector, Leading to Soaring Borrowing Costs – Leading Fast-Moving Consumer Goods (FMCG) firms in Nigeria are facing a financial crisis, as a surge in interest rates coupled with the devaluation of the naira has dramatically inflated borrowing costs in the first half of 2023.
According to an analysis by BusinessDay, the collective finance cost for ten major FMCG companies shot up by an alarming 469.4%, reaching N376.4 billion in H1 2023, from a previous N66.1 billion in the same period last year. The firms affected include industry heavyweights such as Nestle Nigeria, Unilever Nigeria, and Dangote Sugar Refinery, among others.
This financial strain is attributed to the dual impact of the naira’s devaluation this past June and a significant hike in the Monetary Policy Rate, which has seen a jump of 725 basis points to its current 18.75% since May of the previous year.
Abiodun Keripe, Managing Director at Afrinvest Consulting Limited, highlighted the dilemma, stating, “The change in interest rates coupled with the devaluation are primary factors escalating the finance costs for these FMCG firms.”
Furthermore, a breakdown reveals startling figures: Cadbury Nigeria’s finance cost skyrocketed by 22,394.9%, while Guinness Nigeria’s costs jumped by 2,401.9%. A combination of these finance woes and additional factors led to five prominent firms, including Guinness Nigeria and Dangote Sugar, posting a combined loss of N131.9 billion in H1 2023.
Economist Israel Odubola emphasized the role of foreign currency-denominated loans in this situation. “The devaluation of the naira has increased the naira value of these foreign loans, severely affecting especially those multinationals with significant foreign exchange exposure,” he said.
Moreover, the Central Bank of Nigeria’s (CBN) decision in June to merge all segments of the foreign exchange market has seen the naira depreciate steadily against major foreign currencies. The official exchange rate witnessed a rise from N463.38/$ to N747.76/$, while at the parallel market, the naira plunged to N1,000/$ from its earlier 762/$.
This depreciation, coupled with the challenges of sourcing foreign exchange, has pushed Nigeria’s inflation rate to a staggering 18-year high, reaching 25.80% in August.
A recent survey by the Manufacturers Association of Nigeria (MAN) paints a bleak picture, with only 14.7% of manufacturers feeling that forex sourcing rates improved in the second quarter of the year. This ongoing crisis has left manufacturers in dire straits, struggling with the importation of essential non-local products and raw materials.
Toye Folosho of MAN believes a strategic government intervention is the need of the hour. “Manufacturers are procuring forex at exorbitant rates, often resorting to the parallel market. An emergency rescue to restructure the economy and address the forex issue is imperative,” he said.
Echoing this sentiment, Muda Yusuf, CEO of the Centre for Promotion of Private Enterprises, emphasized the need for the CBN to clear the backlog of forex obligations. “Restoring the confidence of both domestic and foreign investors should be of paramount importance,” he asserted.
With the FMCG sector at a critical juncture, a coordinated effort from both the private sector and the government will determine the future trajectory of this essential industry.