Official exchange rate at N790.68, black market gap widens to 28%

The exchange rate between the Nigerian naira and the United States dollar demonstrated some signs of strength as it closed at N790.68 at the end of trading on Wednesday, October 18, 2023. This significant development comes as a result of data sourced from FMDQ, which is a prominent platform for foreign exchange trading and the publication of official exchange rates.

The dollar, at the close of trading, was valued at N790.8 against the naira, marking a notable improvement compared to the previous day when it had reached the staggering rate of N848/$1. This shift implies that the central bank might not be prepared to bridge the gap between the official exchange rate and the unofficial, or black market, rate.

An analysis of the exchange rate data reveals a striking observation: the intra-day high for the exchange rate was N986/$1, which was even higher than the previous day’s rate of N981/$1. This marks a significant departure from what has been observed historically and represents the weakest quote ever recorded for the exchange rate on the official market. In contrast, the intra-day low reached N701/$1, while the reference rate in the NAFEX market remained at N771.94/$1.

However, despite the gains made in the official window, the exchange rate continued to weaken in the parallel market where foreign exchange is transacted unofficially. According to Infostride News tracking, the exchange rate depreciated to N1,100 on the black market, based on quotes obtained from traders engaged in inflow transactions. Similarly, the exchange rate was quoted at N1,100 on various peer-to-peer platforms where transactions are facilitated through cryptocurrencies.

The widening disparity between the official and black market exchange rates has raised concerns in the financial landscape. This gap has now reached 28%, or N309/$1, which is a notable increase from previous figures. Ironically, this widening exchange rate disparity is currently higher in absolute terms than what was observed when Godwin Emefiele served as the Governor of the Central Bank of Nigeria (CBN).

On June 14th, just a day before the announcement of forex unification, the official exchange rate was N471/$1, while the black market rate stood at N760/$1, resulting in a disparity of N289/$1. This represented a disparity of 38%, which was significantly greater than the 28% disparity observed in the present market. In essence, this suggests that the official exchange rate would need to weaken by 28% to align with the rates prevailing in the parallel market.

While such an alignment might be anticipated, especially if the CBN seeks to enhance inflow in the official market, it is crucial that this strategy is backed by substantial supply. Failure to do so could potentially exacerbate the situation, leading to unintended consequences in the already complex foreign exchange market.

The current dynamics in the foreign exchange market raise questions about the underlying factors that have contributed to these fluctuations and disparities. Stakeholders in the Nigerian economy are concerned about the impacts on various sectors and the economy as a whole. The responsibility for addressing these issues and stabilizing the exchange rate lies with key authorities, particularly the Central Bank of Nigeria, which plays a pivotal role in influencing and managing the exchange rate.

The fluctuations in the exchange rate pose challenges to businesses and individuals alike. A volatile exchange rate can make planning and budgeting difficult for businesses that rely on imported goods or engage in international trade. It can lead to higher costs, unpredictable pricing, and supply chain disruptions. For individuals, it can affect the purchasing power of their income and savings, impacting their overall financial well-being.

The official exchange rate and the parallel market rate are often viewed as two key indicators of the stability of a country’s currency. A wide disparity between these rates can erode confidence in the local currency and lead to speculative activities in the forex market. Investors may become cautious, and foreign direct investment may be deterred.

One of the critical challenges that Nigeria faces in managing its exchange rate is the availability of foreign exchange reserves. The central bank’s ability to intervene in the market and stabilize the exchange rate is heavily influenced by the level of reserves it holds. When reserves are low, it becomes challenging to meet the demand for foreign exchange, and this can lead to a depreciation of the local currency.

The role of the central bank in managing the exchange rate cannot be overstated. The central bank implements various policies and measures to regulate the foreign exchange market, including setting the official exchange rate, managing foreign exchange reserves, and intervening in the market when necessary.

A crucial element of exchange rate management is the distinction between the official exchange rate and the black market rate. The official exchange rate is determined by the central bank and is often used for government transactions and official business. In contrast, the black market rate is driven by supply and demand dynamics in the unofficial forex market. The disparity between these two rates has become a point of concern, with various implications for the economy.

The exchange rate disparity has been attributed to several factors. One significant factor is the shortage of foreign exchange reserves. Nigeria’s foreign exchange reserves have faced challenges due to the volatility of global oil prices, which is a key source of foreign exchange earnings for the country. Additionally, the country’s limited diversification of revenue sources and export products has made it vulnerable to fluctuations in oil prices.

The policies and interventions of the central bank also play a significant role in exchange rate disparities. The central bank has employed various measures to manage the exchange rate, including restrictions on access to foreign exchange, forex bans on specific products, and the use of multiple exchange rates. These measures have created distortions in the market and encouraged activities in the parallel market.

Furthermore, economic and political factors have contributed to the exchange rate challenges. Political instability, security concerns, and uncertainties in the business environment can influence investor confidence and the exchange rate. These issues can lead to capital flight and reduce foreign exchange inflows.

Inflationary pressures in the economy can also impact the exchange rate. When inflation is high, it erodes the purchasing power of the local currency, making it less attractive to hold. This can lead to a depreciation of the currency and higher exchange rates.

The impact of exchange rate disparities is felt across various sectors of the Nigerian economy. Import-dependent industries face higher costs when the naira weakens against the dollar. This includes sectors such as manufacturing, agriculture, and technology, which rely on imported raw materials and equipment. The rising cost of imports can lead to higher prices for domestically produced goods, which, in turn, can contribute to inflation.

Furthermore, small and medium-sized enterprises (SMEs) and startups may face challenges in accessing foreign exchange at official rates, which can affect their ability to compete in the global market. The higher cost of forex in the parallel market can be a significant burden for businesses, particularly those operating on tight budgets.

For consumers, exchange rate disparities can affect the prices of imported goods and services, leading to reduced purchasing power and potential economic hardship. In a country where many basic commodities are imported, fluctuations in exchange rates can significantly impact the cost of living.

The financial services sector is also not immune to the consequences of exchange rate disparities. Banks and financial institutions must navigate these fluctuations, which can affect their balance sheets, asset quality, and profitability. Additionally, the uncertainty in the forex market can lead to credit risks as businesses struggle to meet their foreign exchange obligations.

In summary, the exchange rate disparities between the official and black market rates have raised concerns about the stability of the Nigerian naira. These disparities can be attributed to factors such as the shortage of foreign