Foreign Exchange Risk Management and Financial Stability of Import-Dependent Businesses in Abakaliki

Import-dependent businesses in Abakaliki, Ebonyi State, operate within a particularly vulnerable financial environment shaped by persistent naira depreciation, foreign exchange scarcity, and volatile exchange rate fluctuations that directly erode profit margins and disrupt operational planning. This study examines the relationship between foreign exchange risk management practices and the financial stability of import-dependent businesses in Abakaliki. The study is anchored on the International Parity Conditions Theory, particularly Purchasing Power Parity and Interest Rate Parity, which explain exchange rate movements and their implications for cross-border business financial planning. A descriptive survey research design was adopted. The population comprised 186 import-dependent businesses in the electronics, pharmaceutical, and industrial supplies sectors in Abakaliki. A sample of 126 respondents was drawn through stratified random sampling, targeting business owners and finance managers. Data were collected via structured questionnaires and financial records review, and analysed through multiple regression and Pearson correlation. Findings reveal that businesses employing hedging strategies, including forward contracts and natural hedging through local sourcing substitution, demonstrate significantly higher financial stability compared to unhedged firms during exchange rate volatility periods. The study further finds that access to Central Bank foreign exchange windows and banking relationships with strong forex dealing departments significantly moderate the financial impact of exchange rate fluctuations on import costs. It is concluded that proactive foreign exchange risk management is a necessary survival strategy for import-dependent businesses in Abakaliki. The study recommends that businesses establish dedicated treasury management functions and engage experienced forex brokers to navigate currency risk more effectively.

Keywords: Foreign exchange risk, financial stability, import-dependent businesses, Abakaliki, International Parity Theory