Nigeria’s Exchange Rates Gap Widens over US Dollar Scarcity

Nigeria’s Exchange Rates Gap Widens over US Dollar Scarcity

In Nigeria, the exchange rate gap between the official and black market has widened as US dollar challenges persist. Government effort to drive foreign currency inflow has yet to yield results. The external reserve remains tight at around $33.4 billion, with an import cover of seven months, analysts said Hence, currency speculators are having fun cashing with high FX spread as exchange rates failed to converge months after an official devaluation of the naira, data from forex markets shows. Despite rising concerns over falling local currency, analysts are of the view that a market-determined exchange rate would drive capital inflows into Nigeria. Unfortunately, the exchange rate gap widened between the official (N791.75) and parallel markets (N1105) rates to N313 in the just concluded week, casting doubt over the future of the naira – Nigeria local currency. MarketForces Africa reported that in the second quarter of 2023, total capital importation into Nigeria printed at US$1.03 billion, falling by 32.9% over 12 months below US$1,535.35 million recorded in Q2 2022. Detail showed that ‘Other Investment’ ranked top accounting for 81.28% of total capital importation in the period, followed by Portfolio Investment with 10.37% or US$106.85 million and Foreign Direct Investment (FDI) with 8.35% or US$86.03 million. For a nation with more than $450 billion in economic size, a billion US dollar capital imports over 12 months signpost weak external stakeholders’ interest in the country, a senior economist who prefers not to be mentioned said in a chat with MarketForces Africa. Nigerian authorities have used FX and import restrictions extensively to manage external pressures in recent years, resulting in severe foreign currency shortages plaguing the private sector. Analysts said such shortages have delayed Nigerian banks sourcing foreign currency from the Central Bank of Nigeria (CBN) on behalf of importing customers to meet their trade-finance obligations to correspondent banks. Before the recent FX backlog clearing, the situation led to significant delays in Nigerian banks providing foreign currency to international correspondent banks. Nigerian banks have responded by encouraging customers to source foreign themselves, and by utilising their own foreign currency resources as an interim measure to close letters of credit pending the receipt from the CBN, Fitch Ratings said in a note. With pressures on FX inflows, analysts said a market-friendly reform and market clearing exchange rate would help drive capital inflows into the country. This should help to reduce foreign currency shortages and the difficulties banks and importers are experiencing in conducting trade-finance business, according to analysts. In the second quarter of 2023, production sector recorded the highest inflow with US$605.04 million, representing 58.73% of total capital imported in the period. This was followed by the banking sector, valued at US$194.58 million (18.89%), and Shares with US$68.63 million (6.66%). The statistics office said in its report that capital importation during the reference period originated largely from the United States with US$271.92 million, accounting for 26.39%, followed by Singapore and the Republic of South Africa with US$177.44 million (17.22%) and US$136.95 million (13.29%) respectively. Lagos State remained the top destination in Q2 2023 with US$778.06 million, accounting for 75.52% of total capital, followed by Abuja (FCT), with US$194.28 million (18.86%)