The premium between the parallel foreign (FX) exchange rate and the official rate widened from March 2020 until June 2023, the World Bank said in a new report.
Despite changing the official exchange rate to reflect better market conditions in 2021—Nigeria operated multiple currency practices—the parallel rate premium continued to increase to 80 per cent in November 2022 and then to about 60percent in June 2023, as the Central Bank’s interventions to restrict foreign exchange demand and keep the exchange rate artificially low were met with declining FX supply from oil revenues, the report said.
The prioritization of strategic sectors and the imposed price ceilings and trade restrictions pushed transactions to the parallel market, which started to account for a large share of the foreign exchange transactions in the country, including for remittances, tourism, and exports of non-oil products.
After the unification and liberalization of the exchange rates in June 2023, the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) rate converged to the parallel one, closing the gap.
However, resistance toward the increasing pressure on the Nigerian naira coupled with limited supply of FX at the official window has led to the reemergence of the parallel market premium.
The World Bank said The naira has weakened by nearly 40 percent against the US dollar since the mid-June devaluation.
Currently as of Wednesday, October 4, 2023, the exchange rate gap between the official and parallel market widened by 243.79. Dollar was quoted at N756.21 on the Investors’ and Exporters’ (I&E) forex window on Wednesday, while on the parallel market dollar closed at N1,000 on the same day.
Naira on Thursday steadied at N1,000 per dollar as demand moderated on the parallel market.
The World Bank said Nigeria recorded 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.
By April-June 2023, the cash crunch started easing as the central bank extended the deadline to exchange old into new naira notes to the end of this year.
Economic activity was supported by 3.6 percent YoY growth in the non-oil economy (up from 2.8 percent in the first quarter)—that was particularly driven by services (4.4 percent YoY).
However, the report said the poor performance of the oil sector held back growth: it contracted by 13.4 percent YoY (compared to a contraction of 4.2 percent in the previous quarter).
Average production of crude petroleum dropped to 1.22 mbpd in the second quarter
of this year, from 4.3 mbpd in the same quarter of the previous year. The incoming Tinubu administration implemented a series of reforms that included the removal of fuel subsidies, and the devaluation and unification of the exchange rate system.
Petroleum prices have more than tripled since the subsidies were lifted in May.