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Economics Project Topics

The Effects of Exchange Rate Volatility on Firm Performance of Dangote Sugar Refinery Performance

The Effects of Exchange Rate Volatility on Firm Performance of Dangote Sugar Refinery Performance

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THE EFFECTS OF EXCHANGE RATE VOLATILITY ON FIRM PERFORMANCE OF DANGOTE SUGAR REFINERY PERFORMANCE

CHAPTER ONE

Research Objective

In broad terms, this study aims to provide additional evidence on the effect of exchange rate volatility on Dangote Sugar Refinery performance. The study has three specific research objectives:

  • i. ascertains the rate of financial performance of Dangote Sugar Refinery performance at year 2015-2020.
  • ii. investigate the significant relationship between exchange rate volatility and Return on Capital Employed (ROCE) of Dangote Sugar Refinery performance.
  • iii. ascertain significant association between exchange rate volatility and Return on Asset (ROA) of Dangote Sugar Refinery performance

 

CHAPTER TWO

REVIEW OF RELATED LITERATURE

This chapter provides a review of literatures relevant to the study โ€œexchange rate volatility and firm performance of Dangote Sugar Refinery performanceโ€. It also provides empirical support for the theoretical framework as well as shedding more light into the background and the major concepts involved in the study. The review focused on major sub-headings.

2.1 Conceptual Review

Every developing country has the aim of attaining an optimal economic growth accelerated by the favorable balance of trade. The goal of any government is to promote the local firms by ensuring the costs of production and the prices of goods in the local and international markets are competitive enough. On the other hand, the management of the local firms has the objective of maximizing the shareholdersโ€™ value that is brought about by many factors among them coming up with expansion strategy beyond the local markets. However, over the years, one of the major source of risks to the movement of goods across countries is the foreign exchange rate.

Shapiro (2019) developed the theory of foreign exchange exposure which asserts that the performance of the multinational corporations are affected by the volatility of exchange rates. In most cases the effects of exchange rate volatility affects the firmโ€™s export and import value. Such performances tend to fluctuate differently depending on the level of exposure to foreign exchange rate volatility. According to the theory many firms are exposed to the foreign exchange risks through the transaction, translation and economic exposure which not only affects the performance of the firms but also the performance of the industry as a whole.

For many years the issue of exchange rates movements has been a great concern to many stakeholders including the governments and the managers of corporations since 1971 when the Bretton woods fixed rate system was abolished. This system was replaced by the floating rate where the prices of currencies are determined by the forces of demand and supply. Due to the frequent fluctuations of demand and supply of such currencies the floating system has now become responsible for the movement in exchange rates, Abor (2020). On the other side, according to Adler (2018), many economies are becoming more liberalized by opening up their borders to international trade. Therefore for these reasons companies involved in export and import become more exposed to foreign exchange rate volatility. In Nigeria the fluctuations in the foreign exchange rate is one of the macro โ€“economic factors that affects the country ability to trade in the international markets as well as the price levels of goods and services. The foreign exchange rate of a country provides an opportunity to the countryโ€™s economic stability making it to attract the interest of researchers. The exchange rate therefore becomes an important factor in the determination of the countryโ€™s balance of payment, the international trade as well as the overall performance of the economy.

Across the countryโ€™s borders, transactions are denominated in foreign currency which is accepted in both sides of the borders. Such transactions constitute an important aspect of manufacturing and construction industries. The major reason behind this could be because it functions as the medium in which both the seller and the buyer interact to establish a common negotiated price mutually acceptable which act as a point of furthering the cross border transactions and also become part of the settlement vehicles of international trades. Over time, such prices may fluctuate from one equilibrium point to another bringing in the volatility in exchange rates which poses a risk threat to the firms. In essence the fluctuations in the foreign exchange rates affects the performance of firms through the products selling price level, the investment decisions of the firms, their profitability, export sales of goods and services as well as the overall competitiveness in the industries.

Inย ย  Nigeria,ย ย  exchangeย ย  rateย ย  hasย ย  changedย ย  withinย ย  theย ย  timeย ย  frameย ย  fromย ย  regulatedย ย  toย ย  deregulated regimes.ย  Branson & Buiterย  (2021)ย ย  agreedย  thatย  theย  exchangeย  rateย  ofย  theย  nairaย  wasย  relativelyย  stableย  betweenย  1973ย  andย  1979ย  duringย  theย  oilย  boomย  eraย  andย  whenย  agriculturalย  productsย  accountedย  forย  moreย  thanย  70%ย  ofย  theย  nationโ€™sย  grossย  domesticย  productsย  (GDP).ย  Inย  1986ย  whenย  Federalย  governmentย  adoptedย  Structuralย ย  Adjustmentย ย  Policyย ย  (SAP)ย ย  theย ย  countryย ย  movedย ย  fromย ย  aย ย  pegย ย  regimeย ย  toย ย  aย ย  flexibleย  exchangeย  rateย  regimeย  where ย exchangeย  rateย  isย  leftย  completelyย  toย  beย  determinedย  byย  marketย  forcesย  butย  ratherย  theย  prevailingย  systemย  isย  theย  managedย  floatย  wherebyย  monetaryย  authoritiesย  interveneย  periodicallyย  inย  theย  foreignย  exchangeย  marketย  inย  orderย  toย  attainย  someย  strategicย  objectivesย  (Breusch & Godfrey,ย  2021).

This inconsistencyย  inย  policiesย  andย  lackย  ofย  continuityย  inย  exchangeย  rateย  policiesย  aggregatedย  unstableย  natureย  ofย  theย  nairaย  rateย  (Fapetu & Oloyede,ย  2018).ย  notedย ย  thatย ย  despiteย  ย variousย ย  effortsย ย  byย ย  theย ย  governmentย ย  toย  maintainย  aย  stableย  exchangeย  rate,ย  theย  nairaย  hasย  depreciatedย  throughoutย  theย  80โ€™sย  toย  date.ย  Effects of exchangeย ย  rateย ย  fluctuationsย ย  inย ย  developingย ย  countriesย ย  likeย ย  Nigeriaย ย  hasย ย  receivedย ย  considerable attention and generated much debate.ย  Theย  debateย  focusesย  onย  theย  degreeย  ofย  fluctuationsย  inย  theย  exchangeย  rateย  hadย  generatedย  internalย  andย  externalย  shockย  inย  Nigerianย  Economy.ย  Exchange rate ofย ย  aย ย  countryย ย  playsย ย  aย ย  keyย ย  roleย ย  inย ย  internationalย ย  economicย ย  transactionsย ย  becauseย ย  noย ย  nationย ย  can remain in autarky dueย  toย  varyingย  factorย  endowmentย  (Bahmani-Oskooee & Ratha,ย  2020).

2.1.1 Exchange Rate Volatilityย 

The foreign exchange market is characterized by volatility and uncertainty which makes the prediction of future prices difficult. These fluctuations pose a threat to importers and exporters engaging in international business as they are naturally exposed to currency risksย ย  (Adelowokan, 2023)ย ย  . Manufacturing companies are vulnerable to potential gains and losses due to changes in the values of their raw materials and purchase prices that are denominated in foreign currencies. Thus, exportation and importation activities expose these firms to foreign exchange risks.

 

CHAPTER THREE

RESEARCH METHODOLOGY

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3.1ย ย ย ย ย ย  Introduction

This chapter describes the research design and methodology which was adopted in the study. It covers research design to be used in the study, Population, Data and Data Collection Instruments, Data Analysis and Test of Significance.

3.2ย ย ย ย ย ย  Research Design

This is an overall outline that shows how a study was conducted giving out a strategy of how different component in a research study will be integrated together to ensure there is coherence and logical flow. The chosen design ensures there is a framework that effectively answers the research questions. The research design will show the method used to collect, measure and analyze the data, Churchil (2007).

This research employed descriptive design which is a method that entails observing the outcomes and describing the trends and behaviors of the specific variables. The advantage of using descriptive design is that the researcher makes observation of the variables in its unchanged environment as well as large amounts of rich data are gathered and analyzed. It is recommended for this research because it will allow the description, comparison of variables in the study as well as interpretation of the existing relationships between variables. In this study the relationship to be determined is that between exchange rate volatility on firm performance of Dangote Sugar Refinery performance.

 

CHAPTER FOUR

DATA ANALYSIS AND INTERPRETATION

4.1 Introduction

This chapter details data analysis and interpretation of result. The presentation entails descriptive analysis of variables used in the study including exchange rate volatility, return on assets and return on capital employed. Details of correlation between pairs of variables and estimation results presented in this chapter included, regression estimation followed by post estimation evaluation. However, each estimation result was interpreted accordingly. Data used for the analyses conducted in the study are presented in appendix 1.

 

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1ย  ย Introduction

This chapter gives a summary of the study, draw the conclusion of the study and makes the necessary recommendations for further studies.

5.2 ย ย ย ย ย  Summary of the Study

This research study sort to establish the effects of exchange rate volatility on firm performance of Dangote Sugar Refinery performance. Secondary data was collected from the individual companies published financial statements and from Central bank of Nigeria. The research used a descriptive research design.

The regression analysis carried out shows that there is positive correlation between exchange rate volatility and return on capital employed. The results show that exchange rate volatility and return on capital employed move in the same direction. Hence, an increase in exchange rate volatility will also lead to an increase in return on capital employed and vice versa.

According to the research findings, there is no significant impact of exchange rate volatility on return of asset, with F statistics estimate of .580 (p=0.454>0.05). It also shows that effect of exchange volatility on return on capital employed of Dangote Sugar Refinery is significant, furthermore the effect of exchange rate volatility on return of asset of Dangote Sugar Refinery is not significant.

5.3 ย ย ย ย ย  Conclusion

It is from the results of the study and the summary of the study that a conclusion can be drown that foreign exchange rate volatility have a positive but insignificant effect on the financial performances of listed manufacturing firms. It can also be concluded that inflation rate have a negative impact on the financial performance as well as the changes increase in total assets. Overall, foreign exchange volatility, inflation, liquidity, sales volumes and total assets can predict 78.2% of the changes in the profit before tax margin for the Dangote Sugar Refinery.

5.4 ย ย ย ย ย  Recommendations

The results of this research study has found that the R-squared is 0.782. This means that the listed predictor variable in the model explain only 78.2% of the changes in the dependent variable. This therefore means that there are other variables not covered in this study that influence the financial performance of the Dangote Sugar Refinery.it is therefore recommended that other such factors be explored.

This research was studying the Dangote Sugar Refinery in Nigeria which may not adequately represent all the firms involved in the business activities. It is therefore recommended that that more forms be involved.

The study results shows that there was a positive correlation between the foreign exchange rates volatility and the financial performance of the Dangote Sugar Refinery although the level of significance is low. This means that the companies may adopt risk retention strategies when the level of gains or losses that arise from the movement of foreign exchange rate movements are low. However, when such volatilities are high the firms may adopt a risk transfer strategies and should also control and reduce currency risks

Based on the results of this study it is clear that inflation has a negative impact on the financial performance of the Dangote Sugar Refinery.it is therefore recommended that the policy makers and other concerned government agencies come up with a strategy to control the levels of inflation in the country It has been established that Sales volumes has a greater impact on the financial performance of firms. The government is therefore required to come up with measure, policies and concrete structures that help to boost the sales volumes for the local firms. This may be achieved by special economic zones

5.5 ย ย ย ย ย  Limitations of the Study

The study used Profit Before Tax Margins only as the measure of financial performance for the Dangote Sugar Refinery. It is critical to note that there are other variables which can also be used to measure the financial performance. This research study only used five predictor variables which may not be sufficiently enough to explain the changes in the financial performance.

5.6 ย ย ย ย ย  Suggestions for Further Research

The purpose of this study was to establish the effects of exchange rate volatility on firm performance of Dangote Sugar Refinery performance. Such instability in exchange rates has been a major challenge to the developing economies like Nigeria. There are other major macroeconomic factors that are likely to affect the financial wellbeing of local Dangote Sugar Refinery. It therefore calls for further studies on such macro-economic variables that may be responsible for the changes in the financial performance of Dangote Sugar Refinery.

This research study was conducted on Dangote Sugar Refinery. More research could be done on firms across the West African region to establish the effects of such volatility on the financial performance of manufacturing firms listed in the West Africa Securities Exchanges.

 

REFERENCES

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  • Baron, D. P. (2019). Fluctuating exchange rates and the pricing of exports. Economic Inquiry, 14(3), 425-438. https://doi.org/10.1111/j.1465-7295.1976.tb00430.x
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