Demand-Supply Discrepancy Pushes Naira Further Downward: Value Plummets As Dollar Scarcity Hits Banks And Parallel Market

The ongoing disparity between the demand and supply of dollars within both banking institutions and the parallel market has been contributing to the further depreciation of the Nigerian naira, an investigation by The PUNCH has uncovered.

Within a span of less than three weeks, the naira has experienced a devaluation of N100, sliding from an exchange rate of 860/$ to 960/$ as of the end of last week at the parallel market.

Prior to the Central Bank of Nigeria’s decision to allow the free float of the naira against global currencies in June, the currency was trading at 471/$ at the Investor & Exporter (I&E) window.

However, the day after the CBN introduced the new policy on June 13, the naira surged to 664/$.

Subsequently, the naira, which had been trading in proximity at both the official I&E window and the parallel market, began to experience heightened volatility in the black market.

Having surpassed the N900/dollar threshold at the parallel market the preceding week, the naira experienced a decline to 925/dollar in Lagos.

On the most recent Friday, the naira reached a peak of 799/$ before concluding the day at 740.60/$ at the I&E forex window. Conversely, at the parallel market, the naira closed at 930/dollar in Lagos and 960/$ in Abuja.

This concerning trend has resulted from a shortage of dollars in banks, with numerous financial institutions reporting insufficient availability of the US currency to meet customers’ demands.

Parallel market currency dealers have also voiced complaints about the scarcity of dollars.

Bank officials attribute the shortfall to the removal of cash deposit limits on domiciliary accounts by the CBN in June, which led to the repatriation of funds through banks.

Consequently, the demand for dollars has surpassed the available supply by a considerable margin.

An official from a lending institution commented, “While some dollars are being repatriated through the banks, the demand still exceeds supply as everyone continues to seek dollars for imports, PTA, BTA, and other purposes.”

He added, “Nigerians and customers are holding onto dollars due to a lack of trust in the policy. Banks are no longer receiving regular forex supply from the CBN as they used to.”

Another source from a tier-1 bank revealed, “Previously, banks received a weekly supply of dollars from the CBN, but that has now significantly reduced. We haven’t been receiving supply for weeks. Banks are sourcing forex from various avenues.”

Aminu Gwadabe, President of the Association of Bureau De Change Operators of Nigeria, attributed the naira’s weakening to a liquidity squeeze in the foreign exchange market caused by speculators.

Gwadabe noted, “The reduced supplies in the I&E window have shifted demand to the parallel market, where volatility and fluctuations are most prominent. The forex market as a whole is grappling with liquidity shortages.”

He further stated, “Due to the supply constraints, banks are restricting their available resources for visible letters of credit financing and sidelining invisible requests such as PTA, school fees, and medical expenses of their clients. This is inadvertently increasing pressure in the parallel market.”

Gwadabe pointed out that due to Know Your Customer (KYC) requirements, most licensed Bureau De Change operators have lost clients to the parallel market, which lacks regulation and standardization. He described the current situation as challenging for operators excluded from the harmonized market.

Offering potential remedies, Gwadabe emphasized the need for Nigerians to strive for a stable exchange rate, free from illegal economic activities like arbitrage, hoarding, and panic buying.

He expressed the Association’s desire to collaborate with the central bank and the federal government in a comprehensive dialogue and engagement to facilitate a path towards naira recovery.

Additionally, he urged a review of the financial architecture to incorporate Bureau De Change operators into harmonized markets.

Gwadabe concluded that both monetary and fiscal authorities should work to create an enabling environment with friendly policies to address the prevailing challenges.