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Why Naira Drops 23% in 4 Days as Demand Surges in Parallel Market

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Why Naira Drops 23% in 4 Days as Demand Surges in Parallel Market
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In a dramatic turn of events last week, the Nigerian naira plummeted by 23% against the US dollar in just 4 days, recording its worst weekly performance since February. Currency dealers and analysts attribute this sharp depreciation to a confluence of factors.

The primary driver was a surge in demand for dollars in the parallel (black) market, driven by banks and end-users. These entities were exploiting the widening gap between the parallel market rate and the official exchange rate managed by the Central Bank of Nigeria (CBN).

Specifically, banks were aggressively buying dollars in the parallel market, where the rate was significantly lower, and then reselling them to customers at the higher official rate. Similarly, some forex end-users were purchasing dollars in the parallel market, depositing them in their domiciliary accounts, and then selling them to banks at the official rate, pocketing the difference.

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This practice, according to currency dealers, triggered a massive demand for dollars in the parallel market, leading to the 25% depreciation of the naira from ₦1,140 to ₦1,405 per dollar over the 4-day period.

Compounding the problem was the slow pace of dollar disbursement by the CBN to Bureau de Change (BDC) operators. Some BDCs had not received dollars for over two weeks after making naira payments to the apex bank.

The situation was further exacerbated by the absence of CBN intervention in the official foreign exchange market for several weeks, coupled with dwindling inflows from foreign portfolio investors (FPIs).

In a bid to arrest the naira’s freefall, the CBN stepped in on Friday, intervening in the official market and also increasing the speed of dollar disbursement to BDCs. The apex bank’s task force also conducted enforcement activities, visiting BDCs and parallel market locations in Abuja and Kano.

As a result, the naira appreciated in the parallel market, trading at ₦1,300 per dollar on Friday, down from ₦1,405 the previous day. Currency dealers expressed optimism that the naira would continue to appreciate this week, as the CBN’s interventions and enforcement actions had effectively curbed the speculative activities that had driven the depreciation.

Tags: 9jaspectatorsDemand surgeNaira Drops 23%Naira to Dollar rateParallel Marketspectatorsng
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