Market analysts note that a combination of speculation, lack of productivity, and global monetary tightening, has robbed the Naira of value in 2022. As FX demand outweighs supply, the Naira has experienced significant volatility and depreciation in the parallel market. 

The inability to access forex from banks has made individuals and businesses rush to the black market, driving up the cost of exchanging Naira for dollars. The currency dropped at the parallel market by -30.7% from N568/US$1 on January 05, 2022, to a record low of N745 as of December 22, 2022 (see chart 1 below).

Chart 1:

The burden of the FX shortage has lingered even though Nigeria generates FX from four primary sources: crude oil exports, non-oil exports, Diaspora remittances, and foreign direct investment. The oil export constitutes a more significant part of the inflow, making FX inflows highly susceptible to the direction of crude oil prices. 

Nigeria’s Muddy FX Market

Economists note that the severity of FX shortages in 2021 made the CBN halt the FX supply to the Bureau De Change window, leaving the operators no choice but to source for dollars outside the banking net. The policy instigated an initial gap between the official windows and the parallel market, triggering a demand shock that made the naira fall to N570/US$ in December 2021 against N411.93/US$ at the official window. 

Naira at the official window has not seen a similar decline since the CBN frequently intervenes, spending a total of US$11.42bn to defend the currency between January and July 2022. Nonetheless, the Naira depreciated by 8% at the Investor and Exporter FX window from N422.67/US$1 on January 04, 2022, to N456.33/US$1 as of December 22, 2022. The spread between the official window and the parallel market grew to roughly N300, giving room for profit-seeking arbitrators (see chart 2 below).  

Chart 2:

Although FX shortages seem to be the main trigger for naira devaluation, other factors contributed to the loss. Firstly, the Fed’s monetary tightening strengthened the dollar, appreciating by 16% in 2022 before dropping to a 9% gain. The reserve currency became the haven to edge over inflation for investors, leading to most emerging market currencies losing their feet. Another currency sting was the Naira redesigning policy issued by CBN in October. The Naira saw a free fall, dropping to N900/US$1 and N1000 per Uk pound as the swap deadline pressured individuals to seek alternative ways of safekeeping their funds. Howbeit, the chase on black market traders in Abuja and Lagos eased the currency from a record high to N700-800 per dollar. Other Naira depreciation steers include arbitrage (multiple exchange arbitrage) and inflation (see chart 3 below). 

Chart 3:

CBN’s Brazen FX Battle

So far, the CBN has attempted to tackle the FX shortage in the country. It introduced RT 200 programme in February; a non-oil export proceeds repatriation targeted to generate US$200bn FX income in the next three to five years. The scheme has generated US$4.98bn as proceeds in 9 months of 2022, showing an improvement in the diversification of FX revenue. However, the multiple exchange windows need to be addressed. A unified exchange window should be adopted to discourage arbitrage and curb the high demand for dollars.