Key highlights
- The Nigerian naira has reached a new low of N765/$1 at the parallel market, representing a 1.33% depreciation from the beginning of the week.
- Demand for dollars continues to exceed supply, leading many businesses and individuals to rely on the black market.
- Rising inflation, dwindling oil revenues, and a weak external reserve position are contributing to the depreciation of the naira.
The naira continued its downward spiral against the dollar on Tuesday, as it hit a new year low of N765/$1 at the parallel market.
This represents a 1.33% depreciation from the rate of N755 per dollar at the start of the week. The naira has lost over 3% (from N736/$1) of its value against the greenback since the beginning of the year, as the country grapples with dwindling oil revenues, rising inflation, and a weak external reserve position.
The naira’s woes are compounded by the persistent scarcity of foreign exchange in the official market, where the Central Bank of Nigeria (CBN) has maintained a fixed exchange rate of N461 per dollar.
CBN Actions not working: The CBN has also imposed several restrictions on access to forex for various categories of importers and end-users, in a bid to conserve the scarce foreign exchange and curb speculative activities.
- However, these measures have failed to bridge the widening gap between the official and parallel market rates, as demand for dollars continues to outstrip supply.
- Many businesses and individuals have resorted to sourcing forex from the black market, where rates are determined by market forces and influenced by sentiments.
- International airlines recently adjusted their official exchange rate to N551/$1 despite the official rates being quoted at N461/$1.
Why the drop? Analysts’ checks from BDC operators suggest the recent depreciation is connected to increasing demand for forex as Nigerians embark on foreign travels ahead of the summer holidays.
- Some operators also indicate the demand for forex is also due to considerations ahead of a change in government next week, which many suspects could lead to further devaluation at the official market.
- One operator who spoke to Nairametrics opines that the demand for the dollar and Riyal has increased over the coming Muslim festivities next month. Many of the travelers are not able to get FX from the CBN and they rely on the black market.
- Some company executives also inform Nairametrics that forex demand may have increased due to the need to pay for services and key raw materials and equipment needed for their operations.
The disparate views suggest no one is clear about the reason why the depreciation has exacerbated this week suggesting this could just be due to the dynamics of demand and supply which is cyclical.
Nevertheless, the exchange rate has depreciated since the turn of the year and is now more likely to keep depreciating in the coming weeks and months than appreciate.
Economic Woes impacting currency stability: The National Bureau of Statistics recently announced inflation rate had risen to 22.22% as central bank policies fail to slow down the galloping increase in prices of goods and services. The higher inflation rate is often linked to currency depreciations.
- According to analysts at Nairametrics, the naira’s depreciation at the parallel market is a reflection of the prevailing economic realities and the inefficiencies of the current exchange rate regime.
- They argue that the CBN needs to adopt a more flexible and market-driven exchange rate policy that would allow for a convergence of rates across all segments of the forex market and enhance transparency and confidence.
They also call for more fiscal and monetary policy coordination and reforms to address the structural imbalances and vulnerabilities of the Nigerian economy, such as diversifying the revenue base, boosting productivity, improving the business environment, and attracting foreign direct investment.