The Nigerian Naira witnessed a decline on Tuesday, reaching its lowest point in nine months at N800 per dollar. This depreciation can be attributed to a surge in demand for the US dollar in the parallel market, commonly known as the black market.
This represents a 0.62 percent decrease in the value of the Naira compared to the intraday trading rate of N795 per dollar on Tuesday. A trader informed BusinessDay that the high demand for the dollar is driven by various factors, including people purchasing it for summer holidays and importation purposes.
In October 2022, the Naira fell to N800 per dollar due to increased demand from individuals who had stockpiled Naira during the Central Bank of Nigeria’s (CBN) Naira redesign program.
At the Investors and Exporters (I&E) forex window, the Naira experienced a 5.62 percent weakening, with the dollar quoted at N788.42 on Tuesday, compared to N744.07 on Monday, according to data from the FMDQ. The CBN abolished segments of the official FX market on June 14, 2023, and introduced the “willing buyer and willing seller” concept in the I&E Window. This adjustment led to an increase in the official rate from N463.38/$ to the current rate of N800.
Up until mid-June, the exchange rate policy aimed to maintain a relatively stable and lower official exchange rate compared to the market-clearing rate.
According to a recent report by the World Bank, the FX market lacked a transparent and predictable price discovery mechanism due to the utilization of multiple FX windows for different purposes. This limited the availability of foreign exchange at the NAFEX window, forcing economic agents to resort to the parallel market, resulting in arbitrage opportunities and rent-seeking behaviors.
As of June 13, 2023, the parallel market-NAFEX premium stood at 63 percent, indicating a significant overvaluation of the NAFEX rate. To reduce FX demand, preserve external reserves, and maintain a stable NAFEX rate, the CBN implemented administrative controls. These measures included restricting access to foreign exchange for the importation of 43 products since 2015 and reducing the size of FX supply interventions since 2020.
The World Bank report highlighted that the previous approach to exchange rate management hindered investment and economic growth. The recent changes in FX policy and management are seen as positive developments that have the potential to unlock growth.
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