‘Firms should embrace backward integration to hedge FX volatility, inflation’

For companies listed on the nation’s bourse to improve productivity and make some reasonable level of recovery post-pandemic, experts have charged their directors to streamline business operations through backward integration strategies.

Experts stressed the need for quoted firms to seek viable local content opportunities and indigenous production of commodities to solve problems emanating from foreign exchange (forex) volatility and inflationary pressures for a guaranteed return on investment.

It is believed that if listed companies looked inward and sourced their materials locally, they would also develop the capacity of smallholder farmers along the business chain and other rural traders in the long term.

Again, it would reduce, to the barest minimum, the exchange rate volatility and depreciation, which hurt economic performance by contracting output growth and inflation.

The current dollar demand and the effect of inflation on household incomes have become a source of worry to local producers due to their inability to access foreign exchange for raw materials and needed machinery with manufacturers in the chemical, food and pharmaceutical sectors as worst hit by the demanding challenge.

Stakeholders, who spoke with The Guardian linked part of the lull in the nation’s capital market to the failure on the part of companies’ boards to initiate good policies that would help the management to drive the business in a sustainable manner.

Indeed, they suggested that listed firms must adopt 100 per cent local sourcing of raw materials, noting that over-dependence on foreign raw materials and exposure to foreign exchange has, unfortunately, subjected firms to the vicissitudes of the Nigerian economy.

Furthermore, they believed that local production would improve the performance of listed companies and reflect in their share prices on the Nigerian Exchange Limited (NGX).

According to them, some boards of directors have continued to invest in failing businesses that would never yield any dividend.

For instance, the Vice President of Highcap Securities, David Adonri, said operators have adopted new measures to encourage local production, by identifying local companies they can give necessary financial advice.

“Operators are encouraging local production, some operators currently offer necessary financial advice, financial back up for companies and grow them to a level that they can encourage them to come and get listed on the stock exchange.

“Most of these companies are having problems because of over-dependence on foreign exchange either for their raw materials or technology and because there is a shortage of foreign exchange, they are affected negatively. There is a need for listed firms to start looking inward”, he added.

The Chief Research Officer of Investdata Consulting Limited, Ambrose Omordion said the current dollar surge in the foreign exchange market is likely to affect the performance of companies, especially those engaged in manufacturing and depend mainly on imported raw materials.

He also stressed the need for directors and management of listed firms to strategise on how to turn the fortunes of their companies around.

He pointed out that the harsh operating environment; coupled with the forex volatility and rising inflation would definitely impact negatively on the bottom line of listed firms that depend heavily on importation.

Speaking on forex instability and the resultant effect on the importation, the Managing Director of Academy Press Plc, Olugbenga Ladipo said volatility is eating deep into the bottom-line of companies operating in the manufacturing sector.

He stressed the need for the government to ensure that industries, where raw materials are converted to finished goods, are established in Nigeria to reduce the over-dependence of foreign currency.