Naira Plummets to Record Low of N910 per Dollar on P2P Market amid FX Crisis

Nigeria’s foreign exchange (FX) market is facing a lot of pressure from various sources, such as the dwindling net FX reserves, the rising demand for dollar-backed stablecoins, and the persistent currency speculation.

In this blog, we will examine the factors that are affecting the naira’s value and the efforts of the Central Bank of Nigeria (CBN) and other stakeholders to stabilize the situation.

The Rise of Stablecoins and the P2P Market

One of the main drivers of the naira’s depreciation is the increasing popularity of stablecoins, especially Tether (USDT), which are digital tokens that are pegged to the value of the US dollar or other fiat currencies. Stablecoins offer a convenient way for Nigerians to access and store dollars without relying on the traditional banking system, which is often inefficient and restrictive.

Many Nigerians use peer-to-peer (P2P) platforms, such as Binance and Paxful, to buy and sell stablecoins using naira. These platforms allow users to trade directly with each other, bypassing the official exchange rate and avoiding regulatory scrutiny.

According to a JP Morgan report, Nigeria’s net FX reserves stood at only $3.7 billion as of March 2023, significantly lower than previous estimates, due to large currency swaps and borrowing against existing reserves.

The report also noted that Nigeria’s balance of payments deficit indicated a continued FX pressure, which could further weaken the naira. As a result, many Nigerians have turned to stablecoins as a hedge against inflation and currency devaluation.

However, this also poses significant risks, as the P2P market is largely unregulated and vulnerable to fraud and volatility.

The CBN’s Measures and Challenges

The CBN has been trying to stem the tide of the naira’s decline by implementing various measures, such as increasing the cash reserve ratio (CRR) for banks, conducting open market operations (OMO), and adjusting the exchange rate regime.

The CBN has also introduced a Price Verification System (PVS) Portal, which requires importers to submit their Form M applications online before accessing FX from authorized dealers.

The CBN has also announced the operational mechanism of the Bureau De Change (BDC) Operations in Nigeria, which aims to boost participation and liquidity in the FX market. The CBN has also secured an emergency loan of $3 billion from the African Export-Import Bank (Afreximbank) to support the country’s FX market.

However, these initiatives have not been enough to stop the naira from falling against the dollar in different segments of the market. The naira hit a record low of N910 per dollar on the P2P market on Wednesday morning before recovering slightly to N902 per dollar. The naira also depreciated on the parallel market, where it traded at N570 per dollar on Wednesday.

The CBN has reiterated its commitment to achieving price stability and exchange rate stability, but economists have expressed doubts about its ability to do so given its limited FX ammunition and the structural and budgetary challenges facing the economy.

The Economic Impact and Outlook

The naira’s depreciation has had a negative impact on the economy, as it has fueled inflation and increased the cost of living for Nigerians. The inflation rate rose to 18.7% in July 2023, the highest level since 2005. The prices of fuel, food, electricity, and other essential goods and services have skyrocketed in recent months.

The naira has lost nearly half of its value against the US dollar since June 2022, when the CBN announced that it would adopt a flexible exchange rate regime. The naira plunged from N410 per dollar in June 2022 to N902 per dollar in August 2023 on the P2P market.

The outlook for the naira remains bleak, as there are no signs of a significant improvement in the country’s FX situation. The demand for dollars and stablecoins is likely to remain high, as Nigerians seek alternative ways to preserve their wealth and conduct transactions. The CBN will have to devise more effective strategies to address the underlying issues affecting the FX market, such as low oil prices, weak exports, fiscal deficits, and poor governance.

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