The Central Bank Governor on Monday announced that the CBN it was looking to devalue the rate of the Naira against the dollar to between N155/N156 from it’s current price of N150. According to him
“This gives us an opportunity to show the markets we were never committed to fixed exchange rate…the target exchange range aim to maintain stability without putting your reserve position at risk. “I still think somewhere between N150 and N155 or N150 and N is fine N160. If we say its going to be N155 or N156, people know we are going to manage within that band”.
This is definitely not good news for companies with major foreign loans as revaluing them is certain to bring about massive losses due to exchange rate movement. Imagine a company that started this year with a dollar loan of $10m with a moratorium(no payment) of Principal repayment for the year. Meaning they get to only service interest. At the start of the year that loan will be valued at N1.5b in its books, that is $10m multiplied by N150. With the CBN set to devalue the Naira, that loan will increase to N1.6b when it is captured in the companies balance sheet. The additional N100m will be written off to the company’s profits as exchange loss. To bring this close to reality, Starcomms just released their 9months Financial Statement declaring an operating loss of N6.7b. The losses include an exchange loss of N535.5m. An increase of N159.9m from N375.6 at the same period in the prior year. According to them
“The Naira depreciated by N4.75 to N154.1 (2010: N149.35) during the period resulting in an exchange loss of N535.5m (2010: N376m)”.
A depreciation of N4.75 has seemingly cost this company N535.5m!!!!!!! This is the reality that most manufacturing and capital intensive companies will face this year, just as banks smile to astronomical profits. They have no incentive to survive despite the harsh and uncertain environment they operate in. They can’t borrow from local banks as their interest rates are doggedly stuck at double digits with miserly tenors. Foreign denominated loans which come with cheaper single digit loans are now riskier as companies face losses due to erratic devaluation of the Naira. The economic pain is even more excruciating when you consider the level of policy somersault and ramblings from regulators.
This is what ticks me off when I listen to policy makers in Nigeria run their mouths uncontrollably. It is especially difficult to sometimes understand the economic direction of the CBN Governor as he mostly explains issues in very convoluted terms. What does he mean by between N150 and N155 or N150 to N160?? The difference between N150 and N160 is so much that assertions like that need to be made with in the clearest of terms with details showing basis for his assumptions. Imagine if that company were to face a depreciation of N10???
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We need a steady exchange policy,i could imagine the harsh conditions of doing business in Nigeria now to include huge loss to be posted by the affected organisations.
Not just steady, one that is not like a pendulum. 150 today, 155 tomorrow, 160 thr next and back and forth