We recently hosted a panel of experts - lawyers, solar developers, FX specialists and investors – to speak about the recent exchange rate unification policy change in Nigeria and its impact on the solar industry. Much was discussed (find the full recording here) but here are the five key takeaways from the discussion that solar companies should be aware of.
#1: Goodbye two exchange rates: good intentions, bad outcomes
When originally implemented decades ago, the two rate policy had good intentions:
- Incentivize critical sectors which might otherwise suffer
- Helped manage inflationary trend of import economy
Over time there were big downsides, “volatility issues, a bad liquidity situation. For us as foreign investors, it meant that there was a high risk of default of borrowed money, not because businesses didn’t have money, but simply because they could not access FX at the official rate. We saw some businesses waiting for 6-8 months and still unable to access FX,” said Ayokanmi Aderibigbe from Trine.
Nigeria’s new president, Bola Tinubu, campaigned on a platform to remove artificial exchange rates and subsidies that distorted the market and, despite immediate challenges outlined below, all our panelists agree that exchange rate unification is a positive step forward.
#2: The old regime stunted the solar industry
Inflation caused by the lack of FX in the system significantly decreased buying power which stifled solar companies’ ability to deliver energy.
“You don’t want to imagine the potential that is in Nigeria – it is massive. 200M+ people, 55% off grid, that’s 100M+ people off-grid. The truth is, when you look at it in terms of generated power and what we’re supposed to have in terms of power per capita, we currently generate 12-14%.” said Ayodeji Ademilua, CEO of A4&T and the Renewable Energy Association of Nigeria (REAN).
With the recent policy change, panelists are optimistic that more foreign capital will reach Nigeria.
#3: Short term pain is inevitable
The flurry of policy changes has led to recent instability in the Naira, causing pain for solar developers and giving investors a reason to pause. Mr. Aderibigbe from Trine said, “There is a big volatility issue which increases investee’s debt obligation. If we lent $1M, it was 460M Naira, it is now 760M Naira in the space of only 2-3 months. Unless companies can increase their revenues they will not be able to service their debts. This is a concern for us.”
Mr. Ademilua, CEO of A4&T has seen the impacts on solar developers first-hand. “Its difficult, you watch your balance sheet shrink in dollar value in just 2-3 months. The developers are hesitant to get foreign investment for the fear of what it will do to them. Whether you’re trying to raise equity or debt you have to be careful.”
The panelists stated that this short term pain is an inevitable by-product of badly needed policy changes.
#4: Optimism for unified exchange rate in the medium to long term
“I would say foreign investors should feel encouraged by the policy change. The long term effect of unification is that we will see stabilization of rates and we will see more money injected in the system. With more money in the system the FX issues will gradually disappear,” said Desmond Ogba from TEMPLARS.
“I would say foreign investors should feel encouraged by the policy change. The long term effect of unification is that we will see stabilization of rates and we will see more money injected in the system. With more money in the system the FX issues will gradually disappear."
Anthony Oduu from VertoFX echoed Mr. Ogba’s sentiment but noted that foreign investors are waiting to see how the new policy changes impact the market. “Our long-term outlook is positive: the prospect of a stable, free floating currency will increase investment.”
#5: Solutions for solar developers available today
Consumers need energy now and the energy transition is not slowing down. So what can developers do?
In the case of equipment purchasing from OEMs outside of Nigeria, one credible option is for lenders to make payments in hard currency directly to the OEMs. “At Odyssey we are doing exactly this, which mitigates Naira exposure. There is a legal grounding for this in the rules for obtaining Certificate for Capital Importation,” said Piyush Mathur, panel moderator and Chief Business Officer of Odyssey Energy Solutions.
Conclusion
Tinubu’s policies will restore investor confidence in the Nigerian economy which will lead to increased FX availability and in turn help curb inflation. In the short term however, these necessary policy changes are causing headaches for solar companies and investors. Until the Naira settles at the correct market rate, investors and developers will need to continue to find workarounds to bring renewable energy infrastructure online. Odyssey Energy Solutions offers mechanisms for financiers and solar companies to move forward.
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