The naira’s dramatic journey from ₦899 to ₦1,535 per dollar between December 2023 and 2024 represents a staggering 70% devaluation that caught many businesses off guard.
This volatility isn’t just numbers on a screen – it translates to real costs that can devastate profit margins overnight. A business importing $10,000 worth of goods would have paid ₦6.36 million more in December 2024 than the same transaction a year earlier.
For Nigerian SMEs navigating this challenging environment, managing exchange rate volatility has become crucial for survival and growth. This article outlines five proven strategies to protect your business from currency fluctuations while maintaining operational efficiency.
1. Hedging Through Local Sourcing
Natural hedging represents the most straightforward approach to reducing foreign currency exposure by matching your revenue and expenses in the same currency.
This strategy involves systematically replacing imported inputs with locally-sourced alternatives wherever possible.
Start by conducting a comprehensive supply chain audit to identify imported components with viable local substitutes. A furniture manufacturer importing wood from Ghana or Turkey may find better quality alternatives from Nigerian timber suppliers in Cross River or Ogun states. While initial quality differences may exist, working closely with local suppliers often yields improvements over time while eliminating currency risk.
For businesses unable to eliminate imports, aim to source at least 70% of your inputs locally while maintaining 30% strategic imports for quality-critical components. This approach provides currency protection while preserving product standards.
2. Forward Contracts And Currency Hedging
Forward contracts allow businesses to lock in exchange rates for future transactions, providing certainty in an uncertain market. These agreements, increasingly available through major Nigerian banks, enable you to secure today’s rate for currency exchanges occurring weeks or months ahead.
Say you need to import $20,000 worth of equipment in three months. With the current rate at ₦1,536 per dollar, you’d need ₦30.72 million. By entering a forward contract today, you guarantee this rate regardless of future fluctuations. If the naira weakens to ₦1,600 per dollar by then, you save ₦1.28 million.
Contact your bank managers to discuss forward contract options available to you.
3. Multi-Currency Accounts Strategy
Strategic timing of currency conversions can significantly impact your bottom line. Multi-currency accounts offered by Nigerian banks allow you to hold foreign earnings without immediate conversion, providing flexibility to exchange when rates favour your business.
Establish accounts in naira and your primary foreign currency (typically USD). When you receive foreign payments, analyse current exchange rates against recent trends before converting. If the naira appears oversold or central bank intervention seems imminent, consider holding foreign currency temporarily.
You may want to set up automatic alerts when exchange rates reach your target levels for optimal conversion timing.
4. Pricing Strategies And Contract Terms
Implement dynamic pricing mechanisms that automatically adjust for currency fluctuations. This involves building exchange rate clauses into customer contracts and supplier agreements to share currency risk rather than absorbing it entirely.
For B2B services, consider implementing quarterly price reviews tied to exchange rate movements. Include clauses stating that prices will adjust by 50% of any currency movement exceeding 5% from the baseline rate. This approach shares currency risk with clients while maintaining competitiveness.
Export-oriented businesses should price in stable foreign currencies while offering naira discounts during favourable periods.
A logistics company might quote $1,000 for international shipping but offer the naira equivalent minus 3% for local currency payments when the naira strengthens.
Strategy 5: Revenue Diversification
Currency risk diminishes significantly when revenue streams span multiple currencies and markets. This diversification strategy involves systematically building income sources that benefit from different exchange rate scenarios.
Develop local market offerings alongside international services. A web development agency serving foreign clients should simultaneously target Nigerian businesses requiring digital solutions. When the naira strengthens (reducing foreign income value), local revenue streams provide stability.
Consider expanding to other African markets with relatively stable currencies. Ghana’s cedi, Kenya’s shilling, or South Africa’s rand might offer more predictable revenue streams than dollar-dependent transactions.
Action Steps
Managing exchange rate volatility requires a systematic approach combining multiple strategies tailored to your specific business model. While recent naira volatility has created challenges, businesses implementing these strategies can transform currency risk from a threat into a manageable risk.
The key lies in starting with one or two strategies that best fit your current situation, then gradually building a comprehensive currency risk management framework.
Contact us today for expert insights and support for doing business in Nigeria.
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