The Nigerian naira has experienced a significant decline, reaching its lowest value in nine months at N800 per dollar. The depreciation of the local currency by 0.62 percent compared to the intraday trading rate highlights the mounting challenges faced by the Nigerian economy. The surge in demand for the U.S. dollar in the parallel market, popularly known as the black market, has played a crucial role in driving this downward trend.
Traders in the foreign exchange market have attributed the increased demand for the dollar to various factors. Some individuals are purchasing the greenback for their summer holidays, while others require it for importation purposes. This intensified demand echoes a similar scenario witnessed in October 2022 when the naira fell to N800 per dollar due to heightened demand from individuals who had stockpiled naira during the Central Bank of Nigeria’s (CBN) naira redesign program.
The Investors and Exporters (I&E) forex window also saw a weakening of the naira by 5.62 percent. On Tuesday, the dollar was quoted at N788.42, in contrast to N744.07 on Monday, according to data from the FMDQ.
A significant shift in Nigeria’s exchange rate policy occurred on June 14, 2023, when the CBN abolished certain segments of the official FX market in favor of the I&E Window. This adjustment reintroduced the concept of a “willing buyer and willing seller” and led to an increase in the official exchange rate from N463.38 per dollar to the current rate of N800 per dollar.
READ ALSO: Latest Naira To USD, EUR, GBP, and CAD Exchange Rate For Today Wednesday 12 July, 2023
The World Bank, in a recent report, highlighted the deficiencies of the previous exchange rate management approach in Nigeria. It stated that the FX market lacked a clear and predictable price discovery mechanism due to the utilization of multiple FX windows serving different purposes. This limited the availability of foreign exchange at the NAFEX window, forcing economic agents to resort to the parallel market to fulfill their FX requirements, thereby creating arbitrage and rent-seeking opportunities. The report also revealed that as of June 13, 2023, the parallel market–NAFEX premium stood at 63 percent, indicating a significant overvaluation of the NAFEX rate.
To mitigate FX demand, preserve external reserves, and maintain a stable NAFEX rate, the CBN implemented administrative controls. These measures included restricting FX access for importing 43 products since 2015 and reducing the scale of its FX supply interventions since 2020. The World Bank report commended the recent changes made to Nigeria’s FX policy and management, recognizing them as a positive step toward unlocking economic growth and stimulating investment.
The naira’s decline to N800 per dollar underscores the economic challenges faced by Nigeria and emphasizes the importance of establishing an effective and transparent foreign exchange system. The CBN’s ongoing efforts to manage demand, preserve reserves, and promote economic growth must address the underlying issues that drive individuals to seek alternative avenues for their FX needs.
As Nigeria moves forward, it is essential to strike a delicate balance in the foreign exchange market to ensure stability, foster investor confidence, and drive sustainable economic development.
Source: Business Day
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