Nigeria aims to implement new foreign exchange regulations to close the naira’s significant gap with the unofficial rate and achieve a “fair price” by year-end. This move is part of a broader plan to address a backlog of dollar demand and create transparent rules for the country’s official market.*
Nigeria is gearing up to introduce new foreign exchange regulations to tackle illegal currency trading and bridge the naira’s more-than-45% gap with the unofficial exchange rate. The government, aiming for a “fair price” by the end of the year, is set to clear a backlog of approximately $6.7 billion in dollar demand and enhance the naira forward market. Additionally, it plans to establish clear guidelines for the official market, encompassing all legitimate transactions, while curbing the illicit “black market” for foreign currency, as revealed by Taiwo Oyedele, chair of the presidential committee on fiscal policy and tax reforms.
Oyedele anticipates that these changes will materialize before December, potentially within a few weeks, with the naira finding its true value. The government considers a “fair price” for the dollar to be between 650 and 750 naira. This is in contrast to the official exchange rate, which stood at 802.59 as of 1.08 p.m. on Monday. Meanwhile, on the parallel market, where exchange rates are freely determined, the naira traded at 1,165 on Monday.
In June, Nigeria allowed the naira to trade more freely against the dollar, leading to a 40% devaluation. The aim was to attract more dollar inflows and improve liquidity after years of pegging the naira to the dollar. However, the parallel market thrived on the back of an inflexible official exchange.
The significant divergence between official and parallel-market rates has led to a drain on liquidity and supply from the official market, as buyers and sellers are lured to the parallel market seeking a premium.
Nigeria is expecting an influx of $10 billion in the coming weeks, which is anticipated to ease liquidity issues and eliminate the backlog of overdue forward contracts impacting the naira. The finance minister, Wale Edun, shared this at a summit in Abuja last week. President Tinubu signed two executive orders aimed at redirecting dollars from the official foreign exchange window into the parallel market, as noted by Edun. One order will facilitate the issuance of dollar-denominated instruments for Nigerians in-country who possess dollars, while the other will enable the issuance of dollar-denominated bonds targeting Nigerians abroad and foreign investors.
Despite the central bank’s prior announcement that the naira’s exchange rate against the dollar would be determined by supply and demand, it later seemed to reintroduce controls to stabilize the currency after its 40% depreciation. Yemi Cardoso, Nigeria’s central bank governor, emphasized the need for clarity in market operations, which is a work in progress. He believes that once guidelines and rules are clearly defined and predictable, it will assist in managing speculative activities.
