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Nigeria is grappling with a significant gap between its official exchange rate and the rates in the parallel market, with the Naira inching closer to N100/$ as of last Friday.
At the Investors and Exporters Foreign Exchange (I & E FX) window, the rate closed at N777.82/$, while the rates for Bureau de Change (BDC) and Person-to-Person (P2P) transactions remained stagnant at N870/$.
The widening disparity between the official and parallel market rates is the widest seen since the currency’s unification, largely due to an insatiable demand for the US dollar that surpasses the available supply.
Initially, the Central Bank of Nigeria (CBN) indicated a willingness to allow free trade until the currency achieved a market-relevant level. However, concerns are now rising among market participants that the high demand for foreign exchange may lead to further depreciation of the Naira.
Several factors contribute to this predicament, including a significant influx of foreign currency from non-oil sources, such as remittances, tourism, and non-oil exports, into the black market, exacerbating the dollar shortage issue.
Nigeria’s failure to meet the OPEC quota also plays a vital role in determining the Naira’s value, as oil remains a major contributor to the country’s foreign currency earnings. However, declining oil revenues due to oil theft have affected Nigeria’s ability to earn foreign exchange.
Moreover, Nigeria’s crude oil production has fallen short of OPEC’s target, which could further limit the country’s ability to earn foreign exchange in the long term. Experts are now warning that the principle of willing buyer-seller foreign exchange trading could have negative short-term effects on the Nigerian economy.
The high demand for US dollars has driven many Nigerians to turn to the black market, causing prices to surge due to unprecedented demand for the Naira’s currency. Despite the unification of the Naira, the country’s foreign exchange reserves have been declining in recent months, reaching $33.9 billion, the lowest level in two years.
The stability of the Naira depends on various factors, including the country’s monetary and fiscal policies, political stability, security, and investor confidence in the economy. The implementation of new policies by the Central Bank of Nigeria will also play a crucial role.
To address these challenges, the President and his economic team should prioritize investments in education and skills development to cultivate a skilled workforce capable of driving innovation and entrepreneurship. Tackling the issue of high insecurity could boost remittance inflows.
Improving the quality of education and promoting vocational training will empower individuals and boost productivity across all sectors. Additionally, investing in robust infrastructure, including transportation networks, electricity supply, and internet connectivity, is crucial for fostering innovation and economic growth.
Nigeria faces critical challenges in bridging the gap between official and parallel exchange rates. Addressing these issues will require a multifaceted approach, encompassing measures to boost oil production, curb theft, and ensure a steady supply of foreign exchange.
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