The naira has continued to lose value against the dollar in the parallel market, reaching a new low of N938/$1 on Tuesday, August 8, 2023. This is the worst exchange rate in the history of the Nigerian currency, which has depreciated by 16% since the unification of the forex windows in June.
According to forex traders contacted by Newsflash Nigeria, the naira’s plunge is driven by a severe shortage of forex supply in the market, coupled with a high demand from various sectors of the economy.
They said that there were more buyers than sellers of forex in the parallel market, and that the situation was unlikely to improve anytime soon.
Some of the buyers include importers who need to pay for their goods, foreign travellers who need to fund their trips, and speculators who hope to profit from the exchange rate volatility.
The traders also said that some of the demand was coming from the official market, where there is a huge backlog of unmet forex needs estimated at $8-10 billion.
The official market also faces supply constraints, with daily turnover averaging $80 million since July. In the Investor and Exporter Window, where most transactions take place, the exchange rate closed at N774.78/$1 on Tuesday, while the NAFEX rate was N776.
The naira’s depreciation comes despite the government’s efforts to unify the exchange rate windows and eliminate arbitrage opportunities.
On June 14, 2023, the Central Bank of Nigeria (CBN) announced that it would reintroduce the ‘Willing Buyer, Willing Seller’ model at the I&E window, where all eligible transactions can access forex at their preferred rates.
However, forex analysts told Newsflash Nigeria that the CBN has not fully implemented this model, as it still intervenes in the market and places a cap on rates to bid. They said that this approach creates multiple prices in the market and undermines the objective of forex unification.
They also criticised the CBN’s circular on wholesale intervention of July 24, 2023, which categorised banks based on shareholders’ funds for the purpose of bidding for forex. They said that this policy would destroy efficiency and competition in the financial system and favour some banks over others.
They urged the CBN to allow market forces to determine the exchange rate and increase forex supply through various sources, such as diaspora remittances, foreign direct investments, and external reserves. They said that this would help stabilise the naira and restore confidence in the economy.
