Nigeria: Naira Plummets as FX Demand Outpaces Supply

Following a recent display of strength in the foreign exchange (FX) market, the Nigerian naira has experienced a sharp decline due to diminishing inflows of the United States (US) dollar into both official and parallel markets.

As the naira weakens, individuals and corporate entities are finding their purchasing power diminishing, and the future outlook for the local currency remains uncertain. By the conclusion of trading sessions, the naira had depreciated against the US dollar in both the official market for importers and exporters’ window.

The value of the local currency also dropped in the black market. The FDMQ OTC FX board data indicated an exchange rate of N778.42 at the Investors and Exporters window. This represented a 0.87% decline compared to the N771.69 it was valued at against the dollar on the preceding Thursday.

Amidst global moves towards de-dollarization, the dominant US dollar has been strengthening. However, Nigeria has not shown an inclination to join this trend, despite its dwindling FX reserves. An increasing number of countries, along with BRICS nations, are adopting a new economic order that avoids the use of the USD as the primary currency.

Market data revealed that the open indicative rate concluded at N773.29 to the dollar on Friday. The spot exchange rate reached a peak of N799.90 to the dollar during the day’s trading before settling at N778.42.

Within the day’s trading, the naira was even exchanged for as low as N700 to the dollar. The investors and exporters window saw a total of $73.80 million traded on Friday. Meanwhile, the parallel market witnessed a deterioration in the exchange rate to N905 per US dollar.

The market has begun to question the central bank’s decision to reintegrate bureau de change operators into the FX management structure. With a backlog of unmet demand for US dollars from foreign investors, analysts are skeptical about the Central Bank of Nigeria’s ability to supply forex to BDCs.

As a result, speculators are becoming more active as the gap or spread between official and parallel market exchange rates widens. The shortage of foreign currency has significantly eroded the naira’s purchasing power over the years, and the CBN seems to lack a viable solution to reverse this trend.