The exchange rate at the parallel market remained stable closing at N472/$1 on Tuesday, July 21, 2020. However, on the officially recognized NAFEX market, the forex turnover was down by 23.1% while the exchange rate recorded a gain closing at N388.17/$1.
Parallel Market: At the black market where forex is traded unofficially, the Naira remained stable closing at N472 to a dollar on Tuesday, according to information from Nairametrics FX tracker. Nairametrics collates parallel market exchange rates as far back as 2017. The parallel market also caters to forex trades through wire transfers especially for buyers who cannot fulfill their dollar demands at the I&E window or the SMIS window. Exchange rate for wired transfer is often at a premium to the black market rate.
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NAFEX: The Naira appreciated against the dollar at the Investors and Exporters (I&E) window on Tuesday, closing at N388.17/$1, this represents a 33 kobo gain when compared to the N388.50/$1 that was reported on Monday, July 20. The opening indicative rate was N388.50 to a dollar on Tuesday. This represents a 10 kobo drop when compared to the N388.40 to a dollar that was recorded on Friday.
Exchange rate disparity: The exchange rate disparity between the official NAFEX rate and back market rate widened on Tuesday and is now a whopping N84. Nigeria maintains multiple exchange rates comprising the CBN official rate, the BDC rates, SMIS, and the NAFEX (I&E window).
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Nairametrics reported a few weeks ago that the government had set plans in motion to unify the multiple exchange rate in line with requirements from the World Bank. Nigeria is seeking a world bank loan of up to $3 billion. The country has been under pressure from the International Monetary Fund and the World Bank for currency reforms.
Meanwhile, forex turnover at the Investor and Exporters (I&E) window recorded a decline on Tuesday, July 21, 2020, as it dropped by 23.1% day on day. According to the data tracked by Nairametrics, forex turnover decreased from $38.72 million on Monday, July 20, 2020, to $29.77 million on Tuesday, July 21, 2020. The weaker turnover which seems to be getting worse, reaffirms the scarcity of dollars and also an indication of the liquidity pressure in the foreign exchange market. Notwithstanding the exchange rate gain, the turnover is a far cry from the $200 million recorded at major trading days during the last few weeks.
Nairametrics had reported that the forex turnover at the NAFEX window where investors and exporters trade forex was about $1.57 billion between June 2020 and July 17, 2020, which falls short of demand according to reports. This is according to the daily market turnover data tracked from the website of the FMDQOTC within the last few weeks. The forex turnover has averaged $47 million over the last 32 days.
The volatility of the foreign exchange market is basically fueled by low forex inflow and the activities of currency speculators who are encouraged by the widening gap between the official rate and the parallel market rate.
The data from the Central Bank of Nigeria (CBN) shows a decline in the external reserve as it fell from $36.57 billion on June 3, 2020 to $36.08 billion as of July 17, 2020. The declining external reserve reduces the capacity of the CBN to intervene in the forex market, thereby putting more pressure on the market.
Bloomberg reported that Nigeria’s dollar shortage is getting worse with the naira weakening at the black market and banks restricting the spending limit of dollars by their customers abroad using naira debit cards.
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An analyst at Investment one, Douye Mac-Yoroki, said, ‘’A lot of the challenges right now are due to a shortfall in liquidity. The Central Bank is holding on to as much dollars as it can, given that inflows are not coming the way they did previously. Customers who can’t obtain dollars from the Central Bank or other official sources are being forced into the parallel market, pushing the rate higher.’’
‘’A lot of pressure is piling up there, ‘’ he said.
The low forex inflow is primarily due to low remittances and low oil prices (which accounts for about 90% of the country’s foreign exchange earnings) triggered by the coronavirus pandemic. This is also compounded by the suspension of sales of foreign exchange to Bureau De Change (BDCs) operators.