The Exchange rate between the naira and the US dollar dropped significantly by 6.03% in the year 2021 to close at N435/$1 as of the end of trading activities on Friday, compared to N410.25 to a dollar recorded in the corresponding date of last year.
Naira depreciated despite the concerted effort of the apex bank to manage the exchange by intervening in the Investors and Exporters (I&E) window, which has seen the volume of traded forex at the official market witness significant increase compared to the previous year.
According to the Nairametrics forex tracker, at least $32.2 billion was traded on the floor of the I&E window in 2021, which received a significant uptick after the Central Bank discontinued the sales of forex to the Bureau De Change operators in the country and directed the funding to the official market.
Recall, that the apex bank during a monetary policy briefing in July banned the sales of forex to BDC operators, while also putting a stop to the licensing of new BDC operations in the country.
The apex bank accused BDCs of manipulating exchange rates and operating contrary to the agreement binding the sale of forex to the operators. A move, which caused a crash in the exchange rate at the black market and uptick in traded volume at the NAFEX window.
What happened last year
On the final trading day of 2020, the exchange rate between the naira and the US dollar depreciated by 4.12% to close at N410.25/$1 from N394 to a dollar. The huge movement, which indeed signalled where the official rate would be for the year.
A cursory look at the time series data, shows that Naira averaged against the US dollar at N410.27 for the year 2021, closing at a record high of N435/$1 yesterday.
It however appears that the market movement in the past two days is suggesting where the exchange rate would be in the coming year, as the exchange rate closed at N435/$1 on Thursday, 30th December 2021 and maintained the rate today. The rate at N435/$1 signals a similar move as that which played out in the previous year.
Naira crashed by 22.8% at parallel market
At the parallel market, which is a more volatile market, naira crashed against the US dollar to close at N565/$1 on the 31st of December 2021 as against N460/$1, which was recorded at the end of the previous year.
The market differential between the official and the black market was N49.75 as of last year. It has now widened to N140.74, as surging demand for scarce forex puts exchange rate at record levels at the unofficial market.
The exchange rate at the parallel market reached the N500/$1 level in May 2021, and has since continued to sell above the threshold, even reaching as high as N575 to a dollar.
What this means
The depreciation of the exchange rate at both markets is a reflection of the pressure on the local currency as demand for dollars continues to spike at both levels and inflow still at minimal as a result of the recurrent negative trade balance, decline in foreign investments, and diaspora remittances.