When will the exchange rates converge?

Sometime in 2020, Goldman Sachs, one of the leading investment banking firms predicted that the Nigerian official currency, Naira would have a significant devaluation between 2021 and 2022. They made a projection that the naira which was N407/$ at that time would increase to about N500/$. Not only has that prediction come to pass, the exchange rate of the naira/$ has surpassed N500.

Nairametrics, an online centre for data which distils news and information on finance, reported early 2020 that the Central Bank of Nigeria (CBN) had devalued the official exchange rate to N380 from N360.1 per US dollar, representing a decline of 0.06 percent.
The CBN did so in order to close the gap between the official and the parallel markets. Recall that the CBN is mandated to ensure a stabilized economy, and promote sound financial system, which can preserve the international value of the nation’s external reserves and currency.

There is a high level of disparity between official exchange rate and that of the parallel market. This is caused by different factors: the pressure fixated on the nation’s currency, Naira, externally, and characterized by consistent high-priced rate at the black market; Nigeria’s inability to earn much money from the sale of agricultural produce.

However, in 2021, there were different levels of disparities between that years’ high and low exchange rates relative to Nigeria’s official currency, naira.
Between 2016 and 2021, exchange rates fluctuated between the official and parallel market. According to our analysis, the level of disparity between exchange rates in 2016 and 2021 was relatively higher. The lowest exchange rate in 2016 amounted to N197.27, while that year’s highest rate amounted to N348.12/$, which was 0.76 percent apart. The average rate in the year, 2016, amounted to N257.66. This was the year where the country was in recession.

Source: CBN

The consumer prices of basic commodities rose highly, affecting quite a number of individuals across the states of the federation. Substantially, the interest rates were also affected by the higher exchange rate caused by inflation due to higher prices of domestics and imported products.
The disparity between both the highest and lowest exchange rates leaned in 2017. The same effect appeared when compared to the year’s average rate as the three different rates converged. The highest rate of exchange stood at N369.01 and the year’s low stood at N303.40, whereas the average rate of exchange in the year stood at N333.71.

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By 2018, the disparity between the year’s high, low, and average rate of exchange converged the more, and was almost meeting at the same point. The highest exchange rate in that year amounted to N365.72, the year’s low stood at N358.29, or 0.02 percent apart from the year’s high. The average official exchange rate in the year amounted to N361.29.

By 2019, the disparity between the lowest rate of exchange and the year’s high grew apart again, just like it was in between 2016 and 2017. The lowest rate of exchange all through the year declined by 0.14 percent to N306.45, from the lowest exchange rate in the previous year. However, the year’s high amounted to N365.37, which is N0.35 apart higher than the previous year’s high exchange rate.

We should recall that 2019 was a major year for elections in the nation. That may also have an impact on the exchange rate and the economic performance as the case may be. In that year, the time the exchange rate recorded its worst performance was June 2019, which was just after the conclusion of the swearing into offices of the elected leaders at the state and federal level. This conclusion was based on the fact that exchange was better in January, 2019, a month before the elections started.

Substantially in 2020, the exchange rate gap between official and parallel market rates closed further. The lowest rate in that year amounted to N361.29, whereas the highest rate in that year amounted to N394.92 resulting an average exchange rate of N380.26. The highest, lowest and average exchange rates all increased when compared to the previous years, as they increased by 0.17 percent, 0.08 percent, and 0.05 percent respectively. That was also the year when the nation’s economy hit a deficit especially due to the world’s lockdown and crisis from Covid-19.

By 2021, the lowest recorded exchange rate in the nation amounted to N379.53, and the highest rate of exchange amounted to N413.85. The average exchange rate in the year amounted to N403.58, having its worst rate in Q2, April 2021, while the best rate stood in Q4, December 2021. Also, all the rates increased when compared to the rates in the former year; both the lowest and highest exchange rates increased by 0.05 percent, while the average rate increased by 0.06 percent when compared to the previous year.

In a report published by Statista in November 2021, Nigeria emerged as the 16th country with highest rate of inflation of 13.25 percent in comparison to other countries’ currencies in the previous year. Simply put, the Nigerian economy has been affected. The rising inflation impacted the purchasing power of the consumers.

As an import dependent country, the continuous depreciation of the naira against other international currencies has caused more havocs to households and businesses. This is the reason the government and other stakeholders must address the fundamental issue behind exchange fluctuations and depreciation. As things stand, there is no particular time in sight that the various rates could converge.

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