Naira falls record all-time low of N900 at parallel market

The naira plunged to a record low of N900/$1 on the parallel market on Tuesday, as demand for foreign currency outstripped supply with traders quoting the exchange rate as high as N900/$1 for “inflows” and N895/$1 for cash trades. The peer-to-peer market, where cryptocurrency traders exchange forex, also saw the exchange rate soar above N900/$1. Meanwhile, in the official Investor and Exporter Window, the exchange rate closed at N774.78/$1 while the NAFEX rate was N776. The official market also faces supply constraints, with daily turnover averaging $80 million since July. Forex traders attributed the depreciation of the naira to supply constraints saying there were more buyers than sellers in the market and that the situation was unlikely to improve anytime soon. When asked about the source of the increased demand, traders mentioned a diverse set of buyers, including importers, foreign travellers, and speculators. There are concerns among some traders that the state of depreciation is unlikely to improve as demand continues to rise unchecked. Analysts explained that there was a huge backlog of unmet forex demand in the official market, estimated at $8-10 billion. Some of this demand also spills over to the parallel market, as buyers struggle to find enough supply to meet their needs in the official market. The exchange rate between the naira and dollar has weakened by 16 per cent since the reunification of the exchange rate windows. This compares to a depreciation of 2.5 per cent between January 1 and June 14th. The exchange rate weakened by 22.9 per cent in the whole of 2022. The naira has been under pressure in the parallel market for several weeks, as the supply of forex from official sources remains inadequate. On July 1st, the beginning of the second half of the year, the exchange rate in the parallel market was around N772/$1. However, a surge in demand from various segments of the economy, such as importers, foreign travelers and speculators, has triggered exchange rate volatility.

IMF supports Nigeria’s exchange rate unification

The exchange rate unification policy of the President Bola Ahmed Tinubu has received the backing of global lender, the International Monetary Fund (IMF).  Over the last several years, Nigeria has been operating a dual exchange rate regime which had led to round tripping with many Nigerian businesses preferring to trade dollars than engage in their legitimate businesses. According to the Apex Bank had in a statement abolished the dual exchange rate collapsing it into the Investors Exporters (I&E) window.  The regulator stated that it is expected to be a willing seller and a willing buyers  With the policy, all applications for medicals, school fees, business travel allowance/personal travel allowance, and SMEs would now go through the I&E window. in a short statement, on Friday, IMF’s Resident Representative in Nigeria, Ari Aisen said it would support the federal government as it implement the new reform.  “The Fund greatly welcomes the authorities’ decision to introduce a unified market-reflective exchange rate regime in line with our long-standing recommendations. We stand ready to support the new administration in its implementation of FX reforms.” The Bretton Woods institute and experts consistently warned the federal government on the dangers of keeping a dual exchange rate saying it created room for arbitrage.