by Lionesses of Africa Operations Department
There have been many times over the past few years when we have looked at a country’s foreign exchange rate, have watched in horror as it has collapsed, had sleepless nights over the inflation that is sure to come given the needs of the country for US$ based imports (or is already building due to the mismatch between the ‘official’ rate and the parallel black market rate), and wondered how our Lionesses in that country will survive the long nights ahead.
A case in point sadly was the recent collapse of the Nigerian Naira from a fixed rate of around 460NGN:1US$ in June 2023, to 560NGN a month later, to a massive 1630NGN to US$1 in February 2024. Inflation raced up to 31% with food up almost 38% - interest rates were then pushed up to 22.75% and again to over 24% in March in an effort to stop inflation in its tracks by slowing the economy. How can a business plan for this, let alone survive?
Last year 23 African currencies hit record lows against the dollar according to The Economist magazine (here). If major companies such as MTN Group start to announce an 80% fall in full-year profit due to the sharp devaluation in the Nigerian Naira, and Procter & Gamble announce they “…will stop manufacturing in Nigeria, while drug makers GSK Plc and Bayer AG will contract third parties to distribute their products, in part due to tough operating conditions and the naira slump” (here from Reuters) and airlines such as Emirates refuse to fly to Nigeria due to being unable to repatriate profits from the country (since reversed - here), what hope mere mortals when not only prices from all our suppliers go through the roof, but behind the scenes food price inflation hits us, our families, our staff and their communities. A recent hike in gas prices by 200% just exacerbating this issue (here) given so many households and businesses rely on gas to fire the generators required due to a failing national electricity utility. An almost perfect storm.
What can we do? What are the options if you need to borrow either for short term cash flow reasons, or to pay suppliers abroad in a hard currency such as US$?
Sadly as pointed out to us recently by a brilliant lioness-supporting VC investor, there are very few options, and some of those even open up larger dangers. On the few occasions that she has lent into her portfolio companies in local currency to aid short-term cash flow issues (an obvious move, as the alternative would be to pass profits over to banks in the form of high-interest rates and fees, always assuming they could get a loan from their bank of course), there is so little assistance from the development world in the form of local currency lending or hedging (something she required as her fund was US$ denominated) and any from local banks is either non-existent or way too expensive. This meant she had to take a deep breath and ‘hope’ she didn’t take a hit from falling currency. ‘Hope’, as we often say - is a 'four letter word’ in business…you know - the kind your mother used to warn you about.
In this case our Lioness had a supporter who was willing to take the currency risk on, but had our Lioness been forced to take the currency risk on herself, to borrow in US$ but financing that through local currency sales, then a drop in her local currency would hurt, but a collapse that currency would probably mean instant and overnight bankruptcy.
“How did you go bankrupt?” Bill asked. “Two ways,” Mike said. “Gradually and then suddenly.” - Ernest Hemingway ‘The Sun Also Rises.’…and that’s the problem with cash flow, but when it concerns FX rates over which you have no control, and they start to move against you - then believe us, you really do feel the hairs stand up on your head.
This was something that we discussed in December 2022 with a Lioness who came to us to raise a significant amount of US$ to buy a manufacturing line from abroad, to allow her to manufacture products in Nigeria and sell locally. For those wondering why she could not buy the equipment locally - her particular industry was concentrated in Europe and the US (and so therefore the best place for manufacturers of any machinery required), Nigeria being simply a place on the map from which to purchase and export the raw materials for this industry. So yes, this Lioness wanted to be part of what we see as the essential need for Africa to grow - profit has to be built and increased in Africa to build Africa, rather than exported out in raw materials to kindly build the profits and GDP of ‘western’ countries.
“Could we help?”, she asked…
Borrowing a hard currency such as US$, but earning Naira to repay that loan - we advised against for several reasons, mainly to do with the volatility of the currency and given the repayment time was long (plus there was a limit on how much US$ she could buy from the Central Bank at any one time) and no local bank was willing to lend to her, let alone get involved with any hedging. Our Lioness took our advice and instead bootstrapped using her smaller local profit, buying parts of this line as and when she could, slowly building up and adding on to make the full flow system she originally wanted.
For those saying we should have contacted the EXIM Bank in the supplier’s country - have you tried recently contacting such places? Try it. Likewise going to them via the supplier, they would rather not waste their time it seems. Size matters in the land of EXIM - to be fair, that is true the world over in finance.
Moving back to our Lioness now wondering why she had followed our advice, because from January to July 2023 the exchange rate hardly moved…then it did!
The difference in repayments from day one at 443NGN:US$1 if she had borrowed in US$, to an eye-watering 1,560NGN to 1US$, just over a year later was massive. Don’t forget of course that the clock would have started ticking when she signed the PO (Purchase Order) and paid the huge deposit required, and the rest ‘ex-works’ (as the machinery left the factory) - 60 or 90 day terms being very unusual in this situation, then shipping time, then production and sales time and then to cap it all, because her sales are B2B she would get paid not COD but 60 or 90 days later… 12-18 months quickly gets eaten into with little or no repayment time. Think of all those nights she would have gone to bed, with her last look on her phone being the FX market…not the best for a good night’s sleep.
The USD:Naira exchange rate has since moved back, now sitting around 1,150NGN:$1, but that is still 3 times the original rate! Ok, she might have got lucky, the rate might not have moved, or even moved in her favour at which point she would have owed far less - a serious result…but ‘Luck’ is a four-letter word in business, much like ‘Hope’ and ‘Pray’. Surely if one has to rely on luck, hope or even praying for a certain result, then we are doing it wrong!
Be very careful indeed when taking out a loan in a currency that is different from the one in which you get paid, just ask all the Europeans and Brits who took out Swiss Franc mortgages…(here).
Next week we look at these types of real-world issues from a different angle as the recent World Bank Spring meeting has emphasised (here). They told the Development World that they have to ‘focus on outcomes, rather than inputs’ (which got a huge cheer from our office), reminding them in various side meetings that US$ cash allocated or spent is an Input, not an Outcome as many seem to think and often celebrate.
As we constantly say - Jobs and Communities are built from the bottom up especially by women-owned and led businesses such as those created, built, and enlarged by our truly inspirational membership - that is where the support is needed and that is exactly where ‘Outcomes’ reside.
Stay safe.