The World Bank’s latest report reveals that the premium between the parallel foreign exchange (FX) rate and the official rate in Nigeria has been a persistent issue since March 2020, with a widening gap until June 2023.
Despite efforts to align the official exchange rate with market conditions in 2021, Nigeria continued to grapple with multiple currency practices. During this period, the premium on the parallel rate continued to surge, reaching 80 percent in November 2022 and eventually settling at around 60 percent in June 2023. This escalation was primarily attributed to the Central Bank’s interventions aimed at curbing foreign exchange demand and artificially maintaining a low exchange rate. However, these measures were met with a dwindling supply of FX from oil revenues.
The prioritization of certain strategic sectors, coupled with imposed price ceilings and trade restrictions, pushed a significant portion of foreign exchange transactions towards the parallel market. This shift included transactions related to remittances, tourism, and the export of non-oil products.
The situation took a notable turn in June 2023 when the exchange rates were unified and liberalized. The Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) rate converged with the parallel rate, effectively closing the gap that had persisted for years.
However, despite these efforts, resistance to the increasing pressure on the Nigerian naira, combined with limited FX supply at the official window, has led to the reemergence of the parallel market premium.
The World Bank highlighted that the naira has weakened by nearly 40 percent against the US dollar since the mid-June devaluation. As of Wednesday, October 4, 2023, the exchange rate gap between the official and parallel markets further widened to 243.79. On that day, the dollar was quoted at N756.21 on the Investors’ and Exporters’ (I&E) forex window, while on the parallel market, the dollar closed at N1,000.
The situation appeared to stabilize slightly on Thursday, with the naira holding at N1,000 per dollar as demand moderated on the parallel market.
The World Bank’s report also provided insights into Nigeria’s economic activity. It noted that the country recorded a growth in real economic activity of 2.5 percent Year-on-Year (YoY) in the second quarter of 2023, slightly higher than the 2.3 percent in the previous quarter but down from 3.5 percent in the same quarter of 2022.
The improved economic activity in the second quarter was supported by a 3.6 percent YoY growth in the non-oil economy, particularly driven by services with a growth rate of 4.4 percent YoY.
However, the report also highlighted the poor performance of the oil sector, which contracted by 13.4 percent YoY in the second quarter, compared to a contraction of 4.2 percent in the previous quarter. The average production of crude petroleum dropped to 1.22 million barrels per day during the same period.
As Nigeria continues to navigate FX challenges and economic fluctuations, stakeholders are closely monitoring developments in the country’s foreign exchange market and broader economic landscape.
