Many people choose foreign exchange (FX) rates as a quick tool for assessing the economic health of a nation and the reason for this choice is understandable. FX rates are easily accessible and relatively easy to interpret. Comparing the value of a particular currency to other currencies over a time period is not a difficult task.
Just like it is for every country, exchange rates remain a big deal for Nigeria. In March 2023, the National Bureau of Statistics (NBS) reported that Nigeria’s annual import for the year 2022 was ₦25,590.55 billion. This value converted to USD at the December 2022’s official rate is approximately $58 billion. This value of imports indicates that a sizable number of Nigerian households and businesses rely on imported commodities. Since imported goods are priced in foreign currency, exchange rate fluctuations affect the prices that Nigerians pay for goods and services. Hence, the exchange rate affects the income, spending and savings of many households and businesses.
With a focus on 2023, this article presents a summary of the happenings around the FX rates and the performance of the naira so far.
Reform geared towards FX improvement
In a bid to stabilize the exchange rate and strengthen the economy, the Central Bank of Nigeria (CBN) announced that all FX will take place in the Investors and Exporters (I&E). This announcement was made in June 2023, introducing the “willing buyer, willing seller model.” Before this unification of exchange rates, Nigeria had multiple exchange rates which created the room for arbitrage. The government communicated that this market-driven approach to FX will not only reflect the true value of the naira but will also improve the confidence of public investors. The policy also aimed to attract Foreign Direct Investment (FDI) and stimulate economic growth.
Dollar scarcity and the never-ending black market
As much as CBN’s announcement of the unification of exchange rates was applauded by many, the initiative was plagued with one challenge. This challenge is not a new one. The problem is that the demand for dollars is far greater than its supply. A staff of one of the biggest banks in Lagos commented on this dollar scarcity. She explained that the CBN stopped supplying banks with dollars after the announcement of the unification. “The I&E window cannot cater for the needs of everyone. In my branch, we currently have a limited supply of dollars. But the demand is too high,” she added.
This explains why the parallel market has refused to go away. If the people who need dollars can’t get it from the banks, then they will head to the black market.
How did the naira perform in the parallel market?
Due to the limited supply in the official market, many individuals and businesses source their FX from the parallel market. This is why analysing the parallel market is important.
So far, market data confirms the performance of the naira in 2023 cannot be described as impressive. Monthly data from Nigeria’s parallel market reveal that the naira lost value relative to the dollar and the pound. It now costs a significantly greater amount of naira to get a dollar and the British pound than it did in January.
The price of the dollar in the parallel market moved from ₦736 in January to ₦1300 in October 2023. These figures mean that Nigerians who wish to get the dollar in October 2023 would spend 76% more than they would have spent in January 2023.
Caption: Graph of USD/NGN and GPB/NGN in the parallel market
Imports are now more expensive and prices are rising
Analysed data and reports are great. However, speaking to people on the street is important to get a realistic view. Mr Taju is a jewellery importer who owns a store in the Idumota area of Lagos. Mr Taju said the exchange rate crisis has affected all importers.
“It’s not like the products we import have increased in prices. It’s just that we now need more naira to buy the same quantity. A while back when the dollar was N500, with N5 million naira I could import my goods. Now that the dollar is N1000, I need N10 million to import the same quantity of goods. This means I have to increase prices.” He added that this is the same for every importer. Imports are now more expensive and importers need to pass the increase to customers in the form of higher prices.
A stable naira?
The movement of the naira is hard to predict or forecast. In June 2023, a JP Morgan report predicted that the naira would stabilize against the dollar. However, this is yet to happen.
Predicting when the naira will stabilize and/or get stronger is not something that can be done with certainty. However, one thing is certain — the country needs a solid economic plan to stabilize and strengthen the naira. Nigeria has a new CBN governor and a new finance minister. Nigerians eagerly await the success of the policies that this new economic team will implement.
Olushuyi is a chartered accountant and a finance professional.
