The exchange rate between the naira and the dollar plummeted to approximately N1,745/$1 on the parallel market on Wednesday, marking a sharp reversal from the N1,600 levels observed at the end of last week. This development highlights the continued volatility in Nigeria’s foreign exchange market.

Parallel Market Trends

Reports indicate that while some Peer-to-Peer (P2P) platforms quoted the naira at N1,715/$, International Money Transfer Operators (IMTOs) listed the rate at N1,745/$. Popular stock trading platforms such as Bamboo and Trove showed rates of N1,730/$ and N1,736/$, respectively.

On the other hand, Bureau de Change (BDC) operators reported the naira at N1,685/$, a noticeable drop from N1,630/$ recorded earlier in the week.

Official Market Rates and Widening Disparity

In the official market, the naira depreciated further, closing at N1,545/$ on Wednesday—a 1.31% decline from the previous day’s rate of N1,525/$. The growing disparity between the official exchange rate and the parallel market has now widened to about N140, reflecting a significant disconnect between the central bank-managed market and the black market where most retail transactions occur.

Recent Gains and Reversal

Earlier this month, the naira had shown signs of recovery. Following the operationalisation of the Central Bank of Nigeria’s (CBN) new foreign exchange platform, the naira gained N137.69 against the dollar within a week. Data from the CBN’s official website revealed that the exchange rate closed at N1,535/$ on Friday, December 6, up from N1,672.69/$ on November 29—a significant 8.24% appreciation.

These gains were mirrored in the parallel market, where the naira traded at N1,570/$ by the week’s end, a sharp improvement from N1,700/$ earlier in the same week. Over the weekend, the naira further strengthened, peaking at N1,530/$ on Saturday before stabilising at N1,580/$ by Sunday.

Factors Driving Currency Movements

The naira’s brief recovery was largely attributed to:

1. CBN’s New FX Platform: The platform introduced more transparency in foreign exchange trading, which helped bridge the gap between official and parallel market rates.
2. Increased Liquidity: The central bank’s interventions facilitated greater stability and availability of foreign exchange in the market.
3. Confidence Boost from Organised Private Sector (OPS): Members of the OPS urged the CBN to sustain the naira’s momentum, emphasizing the economic benefits of a stronger currency.

Fluctuations in the Parallel Market

Despite the optimism, the naira’s gains have not been sustained. The parallel market, which often reflects unofficial trading activities, saw the naira weaken to N1,745/$ after briefly rallying. Speculators and limited dollar inflows are believed to be major contributors to the volatility.

Impact on the Nigerian Economy

The fluctuations in the naira-dollar exchange rate continue to have far-reaching implications for Nigeria’s economy:

• Rising Import Costs: A weaker naira increases the cost of imported goods, putting pressure on inflation rates.
• Business Uncertainty: The widening gap between official and parallel market rates creates uncertainty for businesses relying on foreign exchange.
• Speculative Activities: The unstable exchange rates encourage speculative trading, further distorting market dynamics.

Way Forward

Experts and stakeholders are calling for sustained efforts to stabilise the naira:

1. CBN Policy Interventions: The central bank must ensure consistent liquidity and enforce measures to curb speculation.
2. Strengthening FX Platform: Continued transparency in foreign exchange transactions will build market confidence.
3. Economic Diversification: Reducing dependency on imports and boosting local production could mitigate the effects of currency depreciation.
4. Public Engagement: Educating the public on the risks of speculative trading and encouraging participation in formal trading platforms could help stabilise the market.

Conclusion

The recent depreciation of the naira highlights the challenges of maintaining currency stability in a volatile economic environment. While the CBN’s new FX platform initially showed promise, sustaining these gains requires robust policy implementation and close monitoring of market dynamics. As Nigeria grapples with these issues, the focus remains on achieving a more stable and transparent foreign exchange market to bolster economic growth and investor confidence.