How Exchange Rates Affect Nigerian Businesses and Consumers

Exchange in currency markets is a key element of what goes on in Nigeria’s economy. They play a role in the price of products, the expense of doing business, and what the average person can buy with what they earn. In other words, an exchange rate is a term which refers to what amount of one country’s money you will get for another’s. For us in Nigeria, the value of the naira to that of the US dollar is of great importance, as we import a great deal of what we use.

When the value of naira changes, we see that businesses and consumers react in different ways. At some times, this may play out over a long period; at other times, almost instantly. What also may be useful is that which has to do with the study of exchange rates, which in turn helps people to see why some products’ prices go up and down and also why, at times, businesses have a hard time in trying to maintain stable prices.

What Is an Exchange Rate?

An exchange rate is what you get when you compare one currency to another. For example, when Nigerians wish to purchase goods from a foreign country, they may have to convert naira to dollars or some other foreign currency at the time of payment.

The exchange rate is in a constant state of change. Out of a few economic variables which it is affected by, that is supply and demand of foreign currencies, what Nigeria imports in terms of quantity, what it exports which in turn brings in income, and also what changes in economic policies do to it.

When the Naira’s value goes down against the dollar, Nigerians see their currency stretch less for the same amount of dollars. This in turn makes imported products more expensive.

How Exchange Rates Affect Nigerian Businesses

One of the ways in which exchange rates play out for Nigerian businesses is in the price of imported goods. Many companies use products from abroad, which may be parts for machinery, electronic equipment, raw and finished materials, fabric for clothes, chemical products, and a host of other items.

For instance, think of a Nigerian firm which imports materials from a foreign country and pays in dollars. If the naira weakens, the company will have to pay in more naira for the same materials. That, in turn, increases the company’s costs.

When businesses see an increase in their costs, they will pass those on to consumers, which in turn affects customers that now see a higher price for what was the same product.

Small businesses are hit hard by this issue. A store which imports phones, shoes, bags, and what have you may see an increase in their costs with rate changes. If the owner doesn’t adjust the prices, the business may see a drop in profit. When the owner does raise prices, some customers may take their business elsewhere.

Exchange rate fluctuations also play a role in which foreign-based suppliers to a local manufacturer see an increase in the price of input materials they use. For instance, a local manufacturer may source some of its materials from a Nigerian vendor, which in turn imports some of its materials from abroad. When the import material costs go up, the Nigerian supplier passes that cost along to the local manufacturer, which in turn sees an increase in its own costs.

Effect on Production

Exchange rate fluctuations, which is what we see day to day, may impact what it costs these manufacturers that use imported, that is, for equipment, spare and raw materials, to produce in Nigeria.

When we see prices go up of these items as a result of exchange rate changes, production costs go up also. Some companies may scale back what they produce because they are unable to maintain the same level of production.

In some cases, which is the case with many companies, they will go for local materials over imported. This puts forth an opportunity for Nigerian producers and farmers. But at the same time, local options may not be available in which the business requires or may not put out the same quality and quantity which the company is looking for.

How Consumers Are Affected

Consumers do also experience the results of exchange rates. When companies pay out more for import of products into the country, we may see the high cost pass on to consumers in the form of higher prices.

For instance, we see that which goes up in price are phones, computers, cars, spare parts, and also some home products when the naira devalues. Also, some local products may see an increase in price should their producers use import materials.

Families may see an increase in the price of items they buy often. When the price goes up but income stays the same, there is less left over for other requirements.

Consumers may put off large purchases. Some may go for the economy options or put off buying non-essential items. Also, this has an impact on businesses which see a drop in sales.

Imported Goods and Local Products

Nigeria brings in a large variety of products. These are food items, machinery, vehicles, electronics, medicines, industrial materials, and other goods. Also, because we conduct many trade transactions in foreign currencies, which the importers may not be familiar with, exchange rates play a role in the price of what is imported.

A weaker naira will make imported products more costly, and that in turn may push some consumers and businesses to look at local products.

This issue presents a chance for Nigerian businesses. If we see local companies which are able to present quality products at fair prices, we may see a trend of more people buying from them as opposed to imported products. Also, this will support local industry and in turn create jobs.

Also, in some cases, local businesses which use imported machines, equipment, or raw materials may see themselves affected. We see that the issue is more complex.

Exchange Rates and Employment

Changes in currency values also play a role in employment. When a business is faced with high costs, they may cut production or put expansion plans on hold. In severe cases, some companies may let go of staff.

On the other hand, we see that exchange rate fluctuations present opportunities for some industries. What we note is that which international manufacturers of goods put forward may do very well when import of foreign goods is made expensive. Also, export companies report to do very well at times when their products are outperforming in foreign markets.

For instance, Nigerian companies which export agricultural products and other goods to foreign markets may see that they pay in foreign currency. This in turn supports their operations once the foreign currency is converted into naira.

Why Businesses Need to Plan

Exchange rates are hard to forecast, which is why it is of great importance for companies that are heavy in foreign goods or payments to plan out.

A business has to see how exchange rate fluctuations play out in terms of their costs and sales price. Also, they may look to source locally when possible, reduce waste, and improve resource management.

Good planning out of which issues may still arise from exchange rate fluctuations, we can put in place measures that will see our businesses do better in a changing environment.

What Can Help Reduce the Problem?

One strategy to put a break on exchange rate fluctuations is to increase local production. As Nigerian businesses produce more of what they need at home, we see less dependency on imports.

Supporting agriculture, manufacturing, and local industries also puts in motion job creation and, at the same time, reduces our foreign currency spending on certain goods.

Nigeria also benefits from growing exports. When we see that the country is selling more products and services to other countries, what we will notice is that it has a chance to earn more foreign exchange, which in turn will support the whole economy.

Conclusion

Exchange rates play a role in many aspects of business and day-to-day life. As the naira’s value goes up or down against foreign currencies, businesses see that play out in higher costs, which in turn sees consumers pay more.

The results play out in imported products, production costs, transport, business growth, and household spending. But also, exchange rate changes may present local producers and exporters with opportunities.

In Nigeria, what is important is to see a growth in our local production systems. As companies produce more at home and we in turn export more of what we produce, import dependency goes down. Also, we see that which exchange rates do is a key issue for businesses, consumers, and other members of the society to be aware of as they play out in price changes and economic activity.