The Nigerian currency, the naira, has continued its recovery against the US dollar at the parallel market, also known as the black market, where it exchanged for N950 per dollar on Friday. This represents a significant improvement from N1,050 per dollar that it traded on Thursday, as demand for the greenback weakened and supply increased.
According to naijabdcs.com, a website that collates the exchange rates of various bureau de change (BDC) operators across the country, the naira appreciated by N100 or 9.52 percent to close at N950/$1 on Friday from N1,050/$1 on Thursday. The local currency also gained N5 against the British pound sterling to close at N1,310/£1 on Friday from N1,315/£1 on Thursday, while it remained unchanged against the euro at N1,180/€1.
The naira’s performance at the parallel market was boosted by the Central Bank of Nigeria (CBN)’s decision to increase the allocation of foreign exchange to BDCs from $20,000 to $50,000 per week. The apex bank also resumed the sale of forex to BDCs on Monday after suspending it for over a year due to the COVID-19 pandemic and the associated lockdowns.
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The Nigerian currency, the naira, has continued its recovery against the US dollar at the parallel market, also known as the black market. According to data from Aboki FX, a website that tracks the exchange rates of major currencies in Nigeria, the naira strengthened by 1.2% to close at N560 per dollar on Friday, November 3, 2023. This is the lowest level since September 23, when the naira traded at N557 per dollar.
The naira’s appreciation at the parallel market comes amid efforts by the Central Bank of Nigeria (CBN) to boost liquidity and stability in the foreign exchange market. The CBN has been injecting dollars into the market through various interventions, such as the Naira 4 Dollar Scheme, which offers an incentive of N5 for every $1 remitted through licensed money transfer operators. The scheme, which was introduced in March 2021 and extended indefinitely in May 2021, aims to encourage diaspora remittances and increase dollar inflows into the country.
Why is the Naira consolidating against the dollar?
The Naira, the official currency of Nigeria, has been gaining strength against the US dollar in recent months. This is a remarkable turnaround from the previous years, when the Naira suffered from high inflation, low oil prices, and political instability. What are the factors behind this consolidation, and what are the implications for the Nigerian economy and its people?
One of the main drivers of the Naira’s appreciation is the increase in oil prices, which have risen from around $40 per barrel in October 2020 to over $80 per barrel in November 2023. Oil is Nigeria’s main export commodity, accounting for about 90% of its foreign exchange earnings. As oil prices rise, Nigeria earns more dollars from its oil sales, which boosts its foreign reserves and supports its currency.
Another factor is the improvement in the macroeconomic management of the country, which has been praised by international institutions such as the IMF and the World Bank. The Nigerian government has implemented several reforms to enhance fiscal discipline, reduce debt, diversify the economy, and attract foreign investment. These reforms have helped to restore confidence in the Naira and reduce the demand for dollars in the parallel market, where the exchange rate is usually higher than the official one.
A third factor is the intervention of the Central Bank of Nigeria (CBN), which has been using various monetary policy tools to stabilize the Naira and curb inflation. The CBN has increased its benchmark interest rate from 11.5% in September 2020 to 14% in November 2023, making it more attractive for investors to hold Naira-denominated assets. The CBN has also sold dollars to authorized dealers and bureau de change at regular intervals, ensuring adequate supply of foreign exchange in the market.
The consolidation of the Naira against the dollar has positive effects for the Nigerian economy and its people. It reduces the cost of imports, especially of essential goods such as food and fuel, which lowers inflation and improves living standards. It also increases the purchasing power of Nigerians abroad, who can remit more money to their families at home. It also enhances the competitiveness of Nigerian exports, especially of non-oil products such as agriculture and manufacturing, which can create more jobs and income.
However, there are also some challenges and risks associated with a stronger Naira. It may discourage foreign investors from investing in Nigeria, as they may perceive a lower return on their capital. It may also hurt some domestic producers who rely on imported inputs or who face competition from cheaper imports. It may also create complacency among policymakers, who may neglect to implement further structural reforms that are needed to sustain long-term growth and development.
Therefore, it is important for Nigeria to maintain a balanced and flexible exchange rate regime that reflects market conditions and economic fundamentals. It is also crucial for Nigeria to continue to pursue sound macroeconomic policies that promote fiscal sustainability, monetary stability, and economic diversification. By doing so, Nigeria can ensure that its currency remains a source of strength and stability for its economy and its people.
The CBN has also been cracking down on illegal operators and activities in the parallel market, such as hoarding, speculation and round-tripping. The apex bank has warned that anyone caught engaging in these practices will face severe sanctions, including arrest and prosecution. The CBN has also urged Nigerians to patronize only licensed and authorized dealers for their foreign exchange needs, and to report any suspicious transactions to the appropriate authorities.
The naira’s recovery at the parallel market is a welcome development for many Nigerians who rely on this segment of the market for their personal and business needs. However, some analysts have cautioned that the naira’s strength at the parallel market may not be sustainable in the long run, unless there is a significant improvement in the country’s macroeconomic fundamentals, such as oil prices, external reserves, inflation and trade balance. They have also called for more reforms and policies that will enhance the productivity and competitiveness of the Nigerian economy and reduce its dependence on oil revenues and imports.