Naira continues to weaken on parallel market, reaches 1,245/$1
…Plummets by 80% to become Africa’s worst-performing currency
By Sodiq Adelakun
On the parallel market, the naira was trading at 1,245 per dollar in early Wednesday trading, while the one-month non-deliverable forwards market had it listed at 1,002.50 naira on Tuesday.
In the latest update from Nigeria’s currency markets, the naira remains entrenched at low levels against the US dollar on the black market due to the Central Bank of Nigeria’s (CBN) struggle to meet the demand for the greenback from both corporations and individuals.
CBN Governor Olayemi Cardoso has previously announced a commitment to let market forces determine exchange rates, while also emphasising the need for clear and consistent regulations to govern market activities.
Despite these intentions, the significant gap between the official and black-market rates continues to widen, with traders showing a strong preference for the higher rates available on the black market.
The already precarious situation is exacerbated by the country’s faltering foreign exchange liquidity, leading to volatility that mirrors the more flexible trading conditions of the unofficial parallel market.
The naira, which has depreciated by approximately 80 percent, now holds the unfortunate title of Africa’s worst-performing currency.
Tuesday’s trading data revealed a concerning 18.90 percent drop in Nigeria’s FX market turnover, with the volume of dollar transactions in the official market falling to $111.76 million from the $137.82 million recorded on Monday.
The scarcity of foreign exchange typically results in the devaluation of the naira, as the reduced supply of dollars causes their value to rise relative to the local currency. This dynamic contributes to increased import costs and adds inflationary pressures to the economy.Contrary to expectations from many experts that the parallel market would shrink following the naira’s devaluation, it appears to remain robust.
The former acting head of the CBN, Folashodun Shonubi, has pointed to the avoidance of traditional banking channels by diaspora remittances as a contributing factor to the scant foreign exchange inflows through official avenues.
As Nigeria grapples with these economic challenges, the disparity between the official and black-market rates continues to signify deeper issues within the country’s foreign exchange system.
He emphasised that remittances from the diaspora actually provide a portion of the funding for the illegal markets.
“We therefore need to be well-informed about a great deal of what is happening there. The sentiment game is off the table.
“We typically follow the literature if we don’t understand the dynamics, even though it might not be the best fit for us.
“We are aware that money has arrived through those remittances, even though it isn’t reflected in the official system. They must be traveling somewhere, then. And the problem with the black market, unofficial market, parallel market, or whatever term you want to use, is that because it is unregulated, it turns into a convenient location for criminal activity,” he added.
Since the low oil prices prior to the pandemic, Africa’s most populated country has experienced severe FX shortages, which has forced foreign investors to sell their local assets and repatriate their profits in dollars.
The FG inability to clear a backlog of dollar demand estimated at about $7 billion hurt the country’s market integrity in getting the much-needed FX support from foreign partners.
The scarcity of dollars eventually makes the naira weaker because more people want to use the few available dollars, which raises the dollar’s value as the local currency. Furthermore, given Nigeria’s dismal economic performance, the naira is probably going to face more challenges in the upcoming year.
Nigeria’s modest growth rates, which were 2.5 percent in the second quarter and 2.3 percent in the first, were expected to continue until 2024, according to PricewaterhouseCoopers.
Yemi Cardoso, in his recent statement, pointed out that the IMF’s forecast for 2024, with a mere 3 percent prediction, is not much better.
He also stated that Nigeria’s oil export revenue is expected to decline in the upcoming year.
The CBN chief further predicts that the country’s oil earnings will decrease due to the OPEC limit of 1.78 million barrels per day. The recent decrease in oil output in Nigeria can be attributed to production stoppages, crude oil theft, and divestment from large oil companies.
Additionally, the weak dollar index, trading close to its lowest level since July, has not benefited the naira, while major currencies have gained support as European central banks maintain a less dovish stance.
