Officially, Nigeria’s naira can be said to be doing pretty well this year, down just 4% against a strong US dollar, ahead of the Canadian dollar and the Swiss franc.
But that is only a small part of the story. The official exchange rate is used only by the government and the well heeled — ordinary Nigerians are suffocating under a 37% drop on the widely-used black market, which most have accepted as a better measure for the local currency.
That makes it one of the world’s worst-performing currencies, after Ghana’s cedi, which is down nearly 55% this year, and the Sri Lankan Rupee.
Its peers include Sierra Leone’s leone, which is down 36%, and the Egyptian pound, which has lost 35%, according to Bloomberg.
Africa’s largest economy operates a tightly controlled official rate but it’s in the parallel market where the exchange rate of the local currency is largely determined by the level of demand for the dollar.
Businesses and ordinary Nigerians are feeling the pain. The Naira volatility is the single largest contributor to the surge in inflation which is ravaging the economy, taking prices of virtually everything to the top and causing considerable concern ahead of the year end festivities.
Rice the staple now cost N51,ooo a bag, and flight ticket fares are now well out of the reach of most of the people.
Nigeria’s central bank rations dollars at the official rate, cutting off access to many businesses and individuals, which in turn drives demand to the unauthorized black market.
This has led to a widening gap between the managed and parallel markets to more than 90%.
While the naira officially closed at 442.75 to the dollar on Friday, currency traders on the streets of Lagos, Nigeria’s commercial hub, quoted the greenback at 890 naira, according Umar Salisu, a bureau de change operator who tracks the data.
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The local unit’s drop in the black market started a day after the central bank announced last week that it will issue redesigned 200-, 500- and 1,000-naira notes from mid-December in a bid to mop up excess cash in circulation.
The Abuja-based regulator gave Nigerians until Jan. 31 to exchange the existing bills for new ones, a tight deadline considering that the central bank estimates that as much as 2.7 trillion naira ($6.1 billion) sits outside bank vaults.
Africa’s most populous country has an average of 4.5 bank branches per 100,000 people and 45% of adults don’t have a bank account.
The naira’s slump is likely to continue in the near term given low oil revenue and rising outflows due to uncertainties associated with February’s presidential election, said Uche Uwaleke, a professor of finance and capital markets at the Nasarawa State University in central Nigeria. The dollar is seen as a safe haven, he said.
“It’s evident that a lot of currency substitution is going on as many people now see the greenback as a better store of value,” Uwaleke said.