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Abstract:As foreign currency demand continued to outpace supply, difference between the official and parallel market exchange rates of the naira expanded last week to its widest level in six years.
As foreign currency demand continued to outpace supply, difference between the official and parallel market exchange rates of the naira expanded last week to its widest level in six years.
On Friday, the official market saw a slight increase in the value of the Naira relative to the US dollar, rising 0.04 percent to N436.33. However, the value of the currency decreased to N715 versus the US dollar in the parallel market, leaving a difference between the two markets of 64%, the most since 2016.
In June 2016, the difference between the two rates reached 84 percent as a result of a crisis of dollar scarcity brought on by a decline in crude oil prices on the world market.
The pressure on the naira has made Nigerians scurry to find dollars to pay for imports and medical.
Many have turn to the black market as a result of the Central Bank of Nigeria's inability to meet demand on the official market, which has led to price increases.
Our employees sell what they want. They are not to blame for the banks' decision to stop lending us money. Because of this, rate keeps rising every day, a currency dealer at Udi Street stated on Friday.
FAILED INTERVENTIONS
In the past three years, the CBN made a number of measures to stabilize the local currency, but with little success.
Since the first quarter of 2020, the bank has depreciated the naira three times due to strain on the country's foreign reserves caused by decreasing oil income.
The bank stopped selling foreign currency to Bureaux Du Change owners in 2021, claiming that the black market had turned into a conduit for nefarious FX movements and corruption. It provided bonuses to people earning foreign currency last year.
As oil, earns less, there is still a dearth of dollars. Investments have been impacted by the scarcity of foreign currency, making it challenging for businesses and investors to repatriate funds. Threats to cease operations were made by foreign airlines.
Additionally, the crisis has put pressure on the naira, fueling inflation. In August, headline inflation soared to 20.5%, the highest level in 17 years.
The dollar is now in strong demand, according to Damilare Ojo, team leader for investment research at Meristem Securities Limited. For instance, many Nigerians are currently traveling abroad to pursue their education and require foreign exchange.
Politicians want more foreign currency; it will become more challenging as elections get closer. A sizable portion of these requests are satisfied in the black market, which has an impact on the local currency's value.
Compared to the black market, the value of the Naira has only been slightly more stable on the official market. Consequently, the difference between the two markets is growing, he said.
NUMEROUS RATES
Nigeria uses a system of numerous exchange rates, which has detrimental effects on investment.
The World Bank Group advised the Nigerian government to reconsider its policy of having multiple exchange rates in addition to its contentious gasoline subsidy system in April.
The most beneficial thing, is to have a single exchange rate that is market-based and stable over a long period of time since it will help to attract investment.
Disclaimer:
The views in this article only represent the author's personal views, and do not constitute investment advice on this platform. This platform does not guarantee the accuracy, completeness and timeliness of the information in the article, and will not be liable for any loss caused by the use of or reliance on the information in the article.
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