Nigeria's foreign exchange crisis gets worse as gap between the two markets widens further

NIGERIA'S foreign exchange crisis has got more severe over recent weeks as the gap between the official and parallel market exchange rates of the naira widened significantly as the demand for foreign currency continued to outstrip supply.

Last Friday, the naira gained marginally against the US dollars at the official market, appreciating by 0.04% to N436.33, according to Financial Markets Dealers Quotations (FMDQ) Exchange figures. However, the currency fell to N715 against the greenback at the parallel market, leaving the gap between the two markets at 64%, which the widest since 2016, according to Bloomberg data.

This spread between the two rates reached 84% in June 2016 following a dollar scarcity crisis triggered by the drop in the price of crude oil on the international oil market. Now, this crisis is getting that bad again as the naira has remained under continued pressure as many Nigerians scramble for dollars to pay tuition fees, medical and import bills.

To make matters worse, the Central Bank of Nigeria’s (CBN) failure to meet the demands in the official market, has forced many to turn to the black market, causing price hikes. One currency dealer said:  “Our people are selling as they like. It is not their fault, the banks are not giving us dollars anymore. That’s why you see the rate keep increasing on a daily basis.”

Over the last three years, the CBN has tried several interventions to stabilise the naira but has achieved little success. Of late, the CBN  has devalued the naira three times since the first quarter of 2020, as lower oil income put pressure on the nation’s foreign reserves.

In 2021, the bank suspended sales of foreign currency to bureaux du change operators, saying the parallel market had become a conduit for illicit forex flows and graft. Last year, it offered bonus payments to those receiving dollars from abroad but still, dollar scarcity has persisted as Nigeria earns less from oil, its chief export item.

This lack of foreign currency has affected investments with companies and investors finding it difficult to repatriate funds. Last year, foreign airlines threatened to shut down their operations on Nigeria because they could not repatriate their funds, which were in naira and needed to be converted into dollars.

As a result, the crisis has also piled pressure on the naira, stoking inflation, with headline inflation surging to 20.5% last August, the highest in 17 years. Damilare Ojo, the team lead at Investment Research at Meristem Securities the approaching elections will make the situation more difficult, amid increasing demand for foreign exchange by politicians.

He added: “This is a period of high demand for the dollar. For instance, this is a time when a lot of Nigerians are travelling abroad for studies, with foreign exchange needs.”