Following increasing demand for the dollar on the parallel market, sometimes known as the black market, the naira sank on Tuesday to N800 per dollar, its lowest level in nine months.
Comparing this to N795, which was the price of one dollar stated during Tuesday’s intraday trade, the value of the naira has decreased by 0.62 percent.
“There is high demand for the dollar. Some people are buying the dollar for the summer holiday. Some are buying for other reasons, like importation,” a trader told BusinessDay.
In October 2022, naira fell to N800 per dollar due to a spike in demand by those who had naira stockpiles during the naira redesign programme of the Central Bank of Nigeria (CBN).
At the Investors and Exporters (I&E) forex window, the naira weakened by 5.62 percent as the dollar was quoted at N788.42 on Tuesday as against N744.07 quoted on Monday, data from the FMDQ indicated.
On June 14, 2023, the CBN abolished segments of the official FX market to the I&E Window, where the “willing buyer and willing seller” was re-introduced. Based on this adjustment, the official rate rose from N463.38/$ to N800 the current rate.
Until mid-June, exchange rate policy remained focused on keeping the official exchange rate littlechanged and well below the market-clearing rate.
The Nigerian Autonomous Foreign Exchange Fixing (NAFEX) rate, which was notionally determined on a willing-buyer—willing-seller basis, continued to be managed by the CBN and did not move in tandem with market fundamentals, said the World Bank in a recent report.
The report said the FX market lacked a clear and predictable price discovery mechanism, primarily due to the use of multiple FX windows to serve multiple purposes. This continued to limit FX supply at the NAFEX window, pushing economic agents into the parallel market to meet their FX requirements, and generated arbitrage and rent-seeking opportunities.
As of June 13, 2023, the parallel market–NAFEX premium was 63 percent, indicating a significant overvaluation of the NAFEX rate. With the aim of reducing FX demand and preserving external reserves, while also maintaining a stable NAFEX rate, the CBN maintained administrative controls. These included restricting access to FX for importing 43 products starting in 2015 and reducing the size of its FX supply interventions since 2020.
The World Bank report said the previous exchange rate management approach impeded investment and growth and the recent changes to FX policy and management are a welcome development, capable of unlocking growth.