In recent times, the Nigerian economic landscape witnessed a significant development with the country's new exchange rate policy. On June 14, 2023, the CBN removed its hard peg on the currency at the Investors and Exporters (I&E) window. This shift led to a sharp fall in the value of the naira. With a flexible exchange rate, the market forces of demand and supply now determine the price of the national currency (naira).
Harnessing Opportunities Amidst Uncertainty
The unification of the exchange rate has brought about a wave of adjustments, opportunities and challenges for businesses, particularly small and medium-sized enterprises (SMEs) that are heavily dependent on imports. To navigate these challenges, SMEs must embrace strategies that enable them to thrive despite the dynamic exchange rate environment. In this short article, we are sharing six (6) strategies that can help businesses navigate the uncertainties in foreign exchange.
Source Locally: The foundation of resilience lies in reducing dependency on imports. Whenever and wherever possible, SMEs can champion local sourcing initiatives. Doing this contributes to the domestic economy and insulates them from the impacts of fluctuating exchange rates.
Pricing Strategies: With the exchange rate becoming a variable factor, SMEs need to rethink their pricing model(s). Flexible pricing strategies that accommodate currency fluctuations allow for adaptability while maintaining profitability.
Long-Term Contracts: Stability is a coveted asset in a volatile landscape. By securing long-term contracts with suppliers or customers, SMEs can establish a predictable pricing framework that mitigates short-term volatility, allowing them to focus on growth.
Adopt Technology: Embracing technology is no longer an option but a necessity. Digital tools and financial technology platforms offer SMEs the means to efficiently manage operations, monitor currency risks, and optimise cash flows.
Access Finance: Exchange rate fluctuations can induce financial strains. SMEs should explore various financial options, including credit lines, working capital loans, and government grants. These resources can act as a buffer against sudden financial pressures stemming from currency volatility.
Diversification: The age-old adage of not putting all eggs in one basket holds. Diversifying product ranges and target markets can be a shield against adverse impacts from currency fluctuations. Operating in multiple markets spreads risk and leverages currency strengths for competitive pricing.
Adaptability and Proactivity: The Path Forward
It's important to acknowledge that there is no one-size-fits-all solution. The effectiveness of these strategies hinges on the unique nature of each SME's business, its exposure to foreign exchange risks, and overall risk tolerance. To flourish in this new reality, SMEs must adopt a proactive approach, embracing adaptability and resilience as guiding principles.
The unification of the naira's exchange rate marks a transformative chapter in Nigeria's economic landscape. SMEs sensitive to currency fluctuations have a choice to make; succumb to challenges or rise to the occasion. By embracing a mix of these strategies, SMEs can weather the storm of exchange rate fluctuations and thrive in the face of uncertainty. As they pave the way for economic growth and innovation, these enterprises exemplify the power of adaptability and resilience in an evolving global economy.
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