The year 2023 brought a lot of trouble for African currencies. Three of the world’s least successful currencies were from Africa: Nigeria’s naira, Angola’s kwanza, and Malawi’s kwacha.
Out of all these, Nigeria’s naira had a really tough time and ended up being the third worst-performing currency globally. It was only surpassed in its struggles by the Lebanese pound and the Argentine peso, which claimed the top spots. This unfortunate situation made the Nigerian naira the worst-performing African currency of the entire year.
In 2023, the value of Nigerian money, called banknotes, went down by 55% compared to the US dollar. This means businesses working in Nigeria had to make about 2.2 times more money in the local currency to stay at the same level when converted to dollars.
Let’s break it down: Imagine you had 100 naira at the beginning of the year, and it could buy you a certain amount of goods. But by the end of the year, because of the decrease in the value of the naira, you would need to have earned 220 naira to buy the same amount of goods in dollars. So, companies in Nigeria had to work extra hard to earn more local money to keep up with the dollar value they had before. It was like a financial challenge for them in 2023. And it is fiercely relatable to the quote from Alice in Wonderland.
“My dear, here we must run as fast as possible, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.”
Lewis Carroll, Alice in Wonderland
This quote from Lewis Carroll’s “Alice in Wonderland” is a whimsical way of expressing the idea that sometimes, to keep up or make progress, you have to exert a lot of effort just to stay where you are.
Imagine you’re in a race, and the only way to not fall behind is to run as fast as you can. But here’s the twist: just running fast enough won’t get you ahead; it only keeps you from losing ground. If you want to make progress and get somewhere, you have to run even faster than what it takes just to stay in the same spot.
Many startups in Nigeria and Africa get their funding in dollars. It’s not surprising that they, and other struggling businesses in different countries, are using the following tactics more often to deal with their financial challenges.
- Managing Local Costs
- Exploring Stable Markets
- Earning in Hard Currency
- Fundraising in Local Currency
Examples of these Strategies in Action:
Managing Local Costs
Paystack’s Approach: Apart from Nigeria, Paystack, a payment platform acquired by Stripe, also operates in Kenya, Ghana, and South Africa. Additionally, it is currently undergoing beta testing in Ivory Coast, Egypt, and Rwanda. However, the majority of its revenues currently come from Nigeria.
When the value of Nigeria’s currency, the naira, dropped significantly, Paystack faced challenges with its foreign costs. This includes expenses related to its engineering hub in Dubai and the payroll for its European employees. To address this, the company had to make some tough decisions. In November, Paystack’s CEO, Shola Akinlade, explained that they had to let go of some foreign employees as part of a strategy to “localize costs.” This means adjusting expenses to better align with the economic conditions in Nigeria, where the company generates a significant portion of its income.
“We’re reducing our operations outside of Africa and will be parting ways with up to 33 employees in Europe and the UAE. In the last 3 years, our hiring philosophy was to recruit great talent regardless of location, including opening an engineering hub in Dubai. We’re changing our operating model to prioritize locating team members within the markets we serve, to localize costs and get closer to customers.”
Paystack CEO, Shola Akinlade (shollsman)
Photo credits: Twitter now known as X
Exploring Stable Markets
Expanding into different parts of Africa is usually seen as a way to grow aggressively since many markets on the continent are relatively small. However, going international within Africa can also serve as a defense mechanism, particularly when dealing with challenges such as the declining value of the naira. Notably, Francophone African markets, tied to the euro, provide a somewhat overlooked source of relief.
In recent times, companies like Termii and Smile ID, heavily reliant on earnings in Nigerian naira, have focused on expanding into Francophone Africa. Termii has set its sights on Ivory Coast, while Smile ID has chosen Ivory Coast and Senegal for its expansion efforts.
Earning in Hard Currency
IrokoTV, a video streaming platform from Nigeria, used to mainly cater to African customers. However, things have changed, and now the company is putting more emphasis on customers in the United States and other countries outside Africa.
According to Jason Njoku, the CEO of IrokoTV, in October, most of the money they earned, about 89%, during the first nine months of 2023 came from customers outside Nigeria. This shift in focus makes sense because of the decrease in the value of Nigeria’s currency, the Naira. In simpler terms, they are now concentrating more on customers abroad because it’s more profitable for them due to changes in the currency value.
Photo credits: LinkedIn
In his post on the 19th of December 2023, he said:
“It’s scary that most people truly don’t understand inflation nor appreciate the absolute wealth destruction of periodic Naira devaluations.”
Fundraising in Local Currency
Fundraising with local money in Africa has some difficulties. But, there’s good news – there are more options for using local money, especially for borrowing.
Look at Tizeti, a company in Nigeria that provides fast internet. In December, they got some money in Nigerian naira from a local bank called Chapel Hill Denham’s Nigeria Infrastructure Debt Fund. They didn’t say how much, though.
The boss at Tizeti says it’s not a good idea to borrow money in dollars if you’re making money in naira.
But there’s a problem – the naira had a really bad year, the worst since Nigeria started being a democracy in 1999. And people think it might get even worse in 2024.
When things get tough, people might start doing things more urgently. Like, businesses might try to manage their costs with their own money to avoid problems with foreign money. They might also try to make money in different ways, like going to new markets. Some businesses might change how they do things to use more stable money. And, they might try harder to get money in their currency.
In Nigeria, it seems like there’s a tough time ahead, and people might have to be creative to make things better.
