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Politics

Currency Dealers, Analysts List Factors Behind Naira’s 23% Depreciation In 4 Days

naira Dollar 1

The Naira experienced a significant 23% decline against the dollar last week, attributed to heightened demand for dollars in the parallel market driven by both banks and end-users, coupled with delays in forex disbursement to BDCs by the Central Bank of Nigeria (CBN).

While the CBN’s intervention in the official Nigeria Foreign Exchange Market (NAFEM) on Friday led to the Naira’s appreciation in the parallel market, currency dealers and analysts remained cautious about the Naira’s outlook for the ensuing week, emphasizing the importance of the speed and effectiveness of CBN interventions.

Over the course of two months, the value of the Naira steadily increased from ₦1,820 per dollar on Wednesday, March 21 to ₦1,140 by Friday, April 19

However, last week, the Naira experienced a depreciation for four consecutive days, dropping by ₦285 (25%) to ₦1,405 per dollar by Thursday, April 25th.

Following the same trend in the official market, the Naira depreciated by ₦169.24 (9.9%) to ₦1,339.23 per dollar on Friday last week, April 26th, from ₦1,169.99 per dollar on Friday, April 19.

Financial Vanguard’s investigation revealed that the Naira’s decline was due to a combination of factors, including fraudulent activities that were encouraged by the lower exchange rate in the parallel market.

Ever since the CBN resumed selling dollars to Bureaux De Change (BDCs), the exchange rate in the parallel market has been lower than the official market exchange rate.

For example, on Friday, April 19, the parallel market rate at ₦1,120 per dollar was ₦64.5 lower than the official rate of ₦1,234.49 per dollar on that day.

Banks turned to the parallel market to take advantage of this gap, purchasing dollars at a lower rate and reselling them to their customers at a higher official exchange rate.

Some forex end-users purchased dollars in the parallel market, deposited them into their domiciliary account, and sold them to banks at a higher official rate, mimicking the steps of banks. 

This practice triggered huge demand for dollars in the parallel market hence the 25% depreciation of Naira in 4 days last week, as reported by currency dealers.

Currency traders also highlighted the delayed distribution of dollars to BDCs by the CBN. They observed that dollar allocations to BDCs are sporadic, leaving some BDCs without any dollar supply for over two weeks after depositing naira funds with the apex bank.

Confirming this to Vanguard, the President, Association of Bureaux De Change Operators of Nigeria, Aminu Gwadabe, said: 

The depreciation of the dollar was caused by two factors. The first was that people were buying from the open (parallel) market, depositing the dollars in their domiciliary accounts and sell in the interbank market and this is because the open (parallel) market rate is always lower than the interbank market rate.

“The second factor is that we have seen the resurgence of Person-to-Person, P2P, where hedging, margin trading are taking place.

“After nipping in the bud of Binance, other platforms sprang up. And you know transactions in those platforms are purely speculative. The likes of Binance can only be profitable at the expense of naira depreciation because it is a market that you buy low and sell higher.

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