An incessant devaluation of the local currency (Naira) by a central bank who seeks to protect the external reserves from macroeconomic shocks has badly dented the profit of Guinness Nigeria Plc.
And the volatility in foreign currency wiped out gains from a hike in key products that propelled revenue as the company’s products are increasingly making inroads into the Nigerian market, which was one of the reasons its shares had one of the highest year to date returns last year.
The company saw net income fall by 54.42 percent to N4.02 billion in December 2022 from N8.82 billion the previous year.
The drop at the top line was largely driven by a 436.30 percent surge in finance costs to N6.71 billion as at December 2022 and a breakdown of finance expenses shows the consumer goods giant incurred N5.77 billion in foreign exchange difference on foreign currency loans and loans on reinstatement of foreign currency balances.
Of course, because the company is dealing in foreign currencies due to a parent company domiciled outside the country, it is susceptible to volatility in the currency caused by a weak currency.
As a result of the coronavirus pandemic and geopolitical tensions such as the Russia and Ukraine war that triggered rising inflation that is forcing central bankers across the globe to embark on monetary tightening at the expense of a recession, the local currency has been under pressure.
Stocking imported inflation is foreign currency scarcity that forces many firms to patronise the inaccessible parallel market for dollars to import raw materials and equipment to meet production.
A foreign exchange gain/loss occurs when a company buys and/or sells goods and services in a foreign currency, and that currency fluctuates relative to their home currency.
The difference in the value of the foreign currency, when converted to the local currency of the seller, is called the exchange rate. If the value of the home currency increases after the conversion, the seller of the goods will have made a foreign currency gain.
However, if the value of the home currency declines after the conversion, the seller will have incurred a foreign exchange loss.
If it is impossible to calculate the current exchange rate at the exact time when the transaction is recognized, the next available exchange rate can be used to calculate the conversion.