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When it comes to Nigeria’s currency, mind the gap, again: the spread between the official and parallel market rates for the naira is widening once more.
During a more than two-week run, the naira strengthened to a six-month high of 390 per dollar on the black market – close to one of the multiple official exchange rates, but still far off the interbank rate of around 305 to the dollar.
However, the naira is weakening once more on the black market, slipping below 400 to the dollar, to 405 to the dollar on Monday, according to traders.
Chronic dollar shortages in Nigeria began after oil prices crashed in 2014, worsened as the central bank restricted supplies of hard currency, and are unlikely to end any time soon.
In the absence of adequate supplies of dollars in the official market, businesses and individuals have been forced to buy hard currency on the black market, stoking demand there and eventually weakening the naira to a record low of 520 in February. Analysts said the gap between the official rate of just over 300 to the dollar and the black market one indicated the scale of unmet demand for hard currency in Africa’s most populous nation.
Reluctant to introduce the free currency float that it promised last June, which could have enabled fresh dollar inflows from investors who had been wary to bring hard currency into the country, the central bank tried to boost liquidity in the official market through more than $1bn in forward sales since February. The sales were cast by Godwin Emefiele, the central bank governor, as an attempt to strengthen the naira.
Though the sales have increased liquidity in the official market, analysts and economists are sceptical as to whether these interventions are sufficient to address demand.
Another problem, highlighted by the International Monetary Fund last week, is the central bank’s sanctioning of more than five exchange rates – in addition to the interbank and black market rates, there are official rates for consumers wanting dollars for school and medical fees abroad, for Muslims making the pilgrimage to Saudi Arabia, and for anyone wishing to buy hard currency at exchange bureaus. “Unifying the foreign exchange rate”, the IMF said in its report, would help regain investor confidence.
But in order to do that, the report argued, foreign exchange market restrictions would need to be removed. This seems unlikely to be on the agenda of the central bank any time soon. On Monday the central bank announced it “will sustain its intervention” in the official market to boost liquidity, this time through shorter dated forwards. It said the coming auctions would be settled between one week and 30 days — instead of the 60-day contracts – and would help meet manufacturers’ demand.
The takeaway? The “urgent reforms” to Nigeria’s management of the currency viewed by the IMF as critical to turning round the economy after a bruising two years are still not on the horizon.