The exchange rate between the dollar and naira is trading between N380 and N420, depending on who is selling and the mode of transfer.
In Nigeria, there are two types of forex you can buy: inflowed dollars and cash dollars. Inflowed dollars refer to forex transferred from one bank domiciliary account to another domiciliary account.
It could also be dollars flowing from a bank account in the US or Europe to a local or foreign bank account in Nigeria. In return, naira is paid to the seller’s account here in Nigeria.
Cash dollars are forex bought from bureau de change operators, black market dealers or anyone who has dollars in cash wishing to sell in exchange for naira. Transfers are therefore made using cash, thus the name “cash dollars”.
According to information from traders, pent up demand for inflow dollars is estimated at anywhere from $800 million to $1.2 billion. Some of the demand is driven by companies looking to pay for their supplies, move revenues to their global offices, repatriate dividend to shareholders or hedge against future cost.
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Unfortunately, the COVID-19 pandemic and the crash in oil prices have all but extinguished supply of dollars from the IFEX market (official market for trading forex).
In an investor email note seen by Nairametrics, the CBN has not sold forex since March 20, 2020 leaving export proceeds as the only source of forex. Unfortunately, supply here is thin and hardly available.
Even when available, it is often quoted at off market prices and as high as N420/$1. In the IFEX window where forex is traded officially, traders reportedly quoted “between N387.50 and N390.00/$ for the USD/NGN pair” on Wednesday, despite the dollar scarcity.
“The IEFX market opened and closed at N387.60 and N386.63 with the highest transaction rate recorded at N401.57/$. Total volume traded for the day was $30.42mn,” as contained in the note to investors.
On exchange rate for “inflow dollars”: Several market reports seen by Nairametrics indicate that “Inflow dollars” trade at prices between N410 and N450 in the parallel market where they are traded over the counter.
Over the counter means they are not traded in the official IFEX market. Traders also opine that the volatility and disparity in price is because no one is really sure who owns dollars to sell or naira to exchange, thus price swings are wild.
READ MORE: Tweak of exchange rates: A bold move from CBN?
It is no longer news that the Nigerian economy could contract by as much as 8% in 2020, no thanks to the increasing cases of coronavirus cases and the fall in oil prices. The economy is being caught in cross-hairs.
What it means: If the scarcity continues, the Nigerian real sector may come to a halt, creating more problems for the ailing economy. Also, more corporate organisations would suffer major setbacks in importation of their inventories.
Most Nigerian corporates rely on this inflow or wired forex to pay for inventory orders, factory inputs, dividends, technical and professional fees, computer equipment, and intangible assets, among others.
The development is causing problems for businesses across sectors, all of which are struggling to get the dollars they need for imports.
The adverse effect is that the scarcity would cause the prices of commodities to skyrocket, putting pressure on local currencies. This dollar squeeze is frustrating investors, increasing costs, and delaying projects. It may hamper future investment in the country.
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Nairametrics Founder, Ugo “Ugodre” Obi-Chukwu, explained that the effect is that companies will have to “source for local substitutes, which can increase the cost of production and delivery timelines” for products. On the naira rate against the US dollar in the parallel market, he added that, “the parallel market depends on whether it is cash exchange or inflow exchange” affecting the price that will be paid.
Managing Partner, GBC Professional Services, Chartered Accountant, Gbenga Badejo, agreed with Obi-Chukwu when he observed that a lot of people hoard dollars not because they want to use them at the moment, but for speculative reasons.
According to him, two days after the CBN adjusted the exchange rate, several people hoarded the currency only to sell at N400 from N365. That is a lot of money.
He said, “CBN has the responsibility to control the market and avoid a situation where people put unnecessary pressure on the naira. People hoarding the currency can’t do anything with what they buy, if money is with them it does not make any sense.”
On the effect that the scarcity of inflow dollars would have on the real sector, he told Nairametrics that CBN should ensure that the economy is not shut despite the lockdown. “Petrodollar is not coming; foreign reserve will be depleted and we must not allow the real sector to suffer any scarcity. The Apex bank should ensure banks meet the demands of manufacturers in that regard,” Badejo added.
I hope we don’t see 2017 again when exchange was as high as 500 naira to a dollar
Quit being so dependent on others. Wake up Africans and begin “Doing-for-self. Cause and effect of “Miseducation of the Negro”
In the abundance of water the fool thirsty…”Rat race” what a big disgrace in those claim to be independent yet remain forever dependent. In loving memory of Robert Nesta Marley…”Rat race”…RIP
Can someone please explain what this figure means in forex trade…410/5….From a broker to a buyer