The Impact Of The Exchange Rate Fluctuation On Multinational Corporations In Nigeria

EVALUATING THE IMPACT OF THE EXCHANGE RATE FLUCTUATION ON MULTINATIONAL CORPORATION IN NIGERIA

by Joshua Ted-Eze 

university of Nigeria 

 1.0 INTRODUCTION

The fluctuations of the exchange rate in Nigeria is a multifaceted problem. This is not only because we have varying exchange rate including bureau du exchange and the parallel or black market. It is also due to the general instability in the economy. This has led to uncertainty and impacted greatly on multinational corporations who remain key players in the global economy and in Nigeria, and depend on the exchange rate to plan for and price their products and likewise, to realize profit. Such fluctuations can enhance as well as exacerbate the profit of multinational corporations. 

An indepth evaluation of the impact of exchange rate fluctuations is therefore quintessential to arrive at workable solutions for a more robust economy.  Multinational companies like Multichoice, Shoprite or SPAR, MTN, Toyota Motors, Shell BP, United African Company (UAC) and other numerous ones dominate the economic ecosystem of Nigeria. Most multinational corporations are often seen as exploitative due to the home-oriented nature of such corporations and the profit repatriation to their home countries. 

However, these corporations as well help to improve technological advancements and provide worthy substitutes that will increase competition in the economy and to ensure Nigeria earns the dividends of industrialization. However, Nigerian companies that have branches outside the countries who are also multinational corporations are seen as blessings in Nigeria due to the large profit they can potentially repratriate back to Nigeria. Either ways, the exchange rate of the economy has lasting impact on the efficacy of multinational corporations who are left at the mercy of the prevailing exchange rate.

2.0 EXCHANGE RATE FLUCTUATIONS IN NIGERIA: THE STATUS QUO 

 Exchange rate is defined as the price of one currency in terms of another. An exchange rate is a rate at which one currency will be exchanged for another currency and affects trade and the movement of money between countries. Exchange rates can be fixed or floating in structure. It is fixed when it is placed by the Central Bank of a country and it floats when it is left to be determined by the invisible hands which connotes the forces of demand and supply in the economy. Either ways, the Central Bank of Nigeria is vested with the power to determine a suitable mechanism for exchange rate of the Nigerian Naira. This position has been given statutory oxygen in S.16 of Central Bank of Nigeria(CBN) Act of 2007. In Mv Sealion(Ex Antibes) & Anor v. Assurance Foreningen Skuld(GJensidig),    the Supreme Court held that "the exchange rate of naira inflation to foreign currency is not a matter that a court can take judicial notice of and it is common knowledge that Nigeria operates different tiers of exchange rates...There is the official exchange rate determined by the CBN, and then exchange rate determined by bureau de change operators and then the third aspect being the exchange rate prevailing in the black/parallel market." The above compounds the problem of exchange rate due to different obtainable rates operating at the same time. ). Exchange rate fluctuation is the continuous gyration in the foreign exchange market of nations which has emerged as the dominant subject of discussion in recent international finance literature owing to its fatal consequences on the economies of developing nations like Nigeria. 

3.0 IMPACT OF EXCHANGE RATE FLUCTUATIONS ON MULTINATIONAL CORPORATIONS

A multinational company is a company that has business operations in at least one country other than its home country. Black's Law Dictionary suggests that a company or group should be considered a multinational corporation "if it derives 25% or more of its revenue from out-of-home-country operations". This multinational corporations have been and always remain the highlight of the impact on exchange rate fluctuations. The impacts on this multinational companies can be direct, as well as indirect, in that exchange rate fluctuations could create a chain of causation which will finally have strong effects on multinational corporations.  However there are also some few positive sides of exchange rate fluctuations. Some of them will be disscussed in the course of this essay. 

3.1 INFLATION AS A RESULT OF EXCHANGE RATE FLUCTUATIONS AND ITS IMPACT ON MULTINATIONAL CORPORATIONS

Nigeria's annual inflation rate increased to 28.9% in November 2023, the highest since August 2005 and above market expectations of 27.9%, up from 27.3% in the previous month. Inflation is a major problem in Nigeria economy due to the fluctuations in exchange rate value. A depreciation of the exchange rate will invariably lead to inflation in the economy. The prices for import will become more expensive. This is due to the fact that  more of the naira will be needed to purchase same amount of imported goods. The hike in the prices of imported goods can increase cost of business for multinational corporations. Also, the inflationary problems can cause a decline in purchasing ability of multinational corporations making them run on a loss. This will inadvertently scare them away from the country and hamper economic development.  

However, the positive side of it is that an increase in price of imports will heighten competition between local firms and these multinational corporations which would lead to economic stability and reduce monopoly which is against consumer interests. 

3.2 HIGHER INTEREST RATES 

 On May 24, 2023, it was reported that Nigeria's central bank raised its main interest rate by another 50 basis points to 18.50% (NGCBIR=ECI) on Wednesday, and its governor promised to sustain rate hikes for as long as price pressures remained elevated in Africa's biggest economy.Owingtotheunsteadynatureofexchangerates,theinterestratesmaybeincreasedbytheCentralBankofNigeriatocushionthiseffectsandthiscouldleadtodifferenteffectsonMNCsintheNigerianeconomy. Looking at the positives, an interest rate that is high can attract foreign multinationals to establish their companies in Nigeria and this can facilitate economic growth and development.

 On the cons of it, the height of the interest rate can make borrowing of the naira more exorbitant and increasing cost and reduce profits. This will scare away foreign investments and could also lead to shut down of the available MNCs in Nigeria. For example, Dangote, a multinational corporation, has experienced increase in cost of business and sonetimes will need to borrow. A high interest rate will reduce propensity of this corporation to make profit. Remember, Dangote Companies will still repatriate profit from abroad back to Nigeria. When the base of the company is weak, it will also reduce the net income from abroad. 

4.0 LOOKING AHEAD, THE WAY FORWARD

In the quest to salvage the situation, the following are my recommendations:  

Currency forwards: Currency forwards can be effectively used to hedge currency risk. For example, assume a U.S. investor has a euro-denominated bond maturing in a year's time and is concerned about the risk of the euro declining against the U.S. dollar in that time frame. The investor can enter into a forward contract to sell euros (in an amount equal to the maturity value of the bond) and buy U.S. dollars at the one-year forward rate. While the advantage of forward contracts is that they can be customized to specific amounts and maturities, a major drawback is that they are not readily accessible to individual investors. An alternative way to hedge currency risk is to construct a synthetic forward contract using the money market hedge. 

Currency futures: Currency futures are used to hedge exchange rate risk because they trade on an exchange and need only a small amount of upfront margin. The disadvantages are that they cannot be customized and are only available for fixed dates. 

Currency Options: Currency options offer another feasible alternative to hedging exchange rate risk. Currency options give an investor or trader the right to buy or sell a specific currency in a specified amount on or before the expiration date at the strike price. 

5.0 CONCLUSION

Conclusively, the unpredictability of this exchange rate is not only multiple but complex as well making it very porous, exploitative and sometimes burdening on this multinational corporations in Nigeria.