Nigeria, Africa’s largest economy, is facing a forex crisis that the country’s official exchange rate does not represent. The forex crisis in the country has seen Nigeria’s foreign reserves fall from $40.520 billion as of December 31, 2021, to $38.318 billion at the end of September 2022, representing a $2.202 billion difference. Experts have projected Nigeria’s forex reserve to deplete to $35 billion by the end of 2022 if the demand keeps outweighing the supply. 

The official exchange rate does not represent this predicament and its effects on Nigerians. As Naira, Nigeria’s currency was trading at $1 to N442.50 at the time of this report. Meanwhile, in the currency black market, the Naira has crashed to over N800 to $1; almost two times the value at official channels. Over the last year (7th Nov 2021 – 7th Nov 2022), official exchange rate channels have recorded a depreciation of just 31.98 points as against the over 300 points the black markets have moved. 

Why this is happening 
This spike in the price difference between the official and black exchange rate is primarily because of the forex shortage in Nigeria, which has seen the federal government lower the spending limits on naira debit cards from $100 to $20 per month. Some commercial banks in the country have also entirely wiped out the option to complete international transactions with Naira debit cards. 

The inability of official channels to process and meet the increased demand for forex has then forced businesses, international students, and citizens to patronize bureau de change traders or black-market vendors who operate without administrative and executive oversight. 

  • The increased demand for their services spiked the price difference between the official and black exchange rate, which in turn affects the operating cost of businesses in the country. 
  • Another reason is the Central Bank of Nigeria (CBN) policy to redesign bank notes which has brought into circulation piles of cash Nigerians had stashed away over the years. In order not to fall under the radar of the country’s financial agencies by depositing it into commercial banks, they have opted to convert these enormous stacks of cash notes to dollars.

The big picture 
With limited access to forex or exorbitant exchange rate, Nigerian businesses that require foreign expertise or purchase goods or equipment from international markets battle sustainability and profitability as they continue to scramble for foreign currencies to fund their businesses. International students and other Nigerians in need of forex obtain these currencies at exorbitant rates. 

  • This dilemma ultimately results in the inflation of commodities locally, as profitability declines as operational costs rise. Also, there is distrust between buyers and sellers as price changes are unpredictable and a smaller profit margin for businesses, if any. 
Leave a Reply

Your email address will not be published.