The Nigerian Naira fell to N604/$ at the parallel from N565 at the start of the year.
The official naira rate was 415.95 as of 6.26 p.m local time on Wednesday. The parallel market thrives on shortages, which has helped drive the gap in the two rates to above 40%.
This is based on information acquired from Nigerian BDCs, who attribute the increase in dollar demand to the election season as politicians stocking up on dollars before Nigeria’s primary elections start over the weekend.
Despite international calls for the Naira to be completely floated, the Central Bank has maintained its managed float approach. As a result, the Naira’s crash in the black market has widened the gap between the official Investors and Exporters (I&E) window and the black market.
Through intervention supported by external reserves, the CBN fixes the exchange rate in the I&E window at around N418. The difference between the I&E and the black market has expanded by N188 as the Naira continues to decline.
The volatility in the FX market, according to Anwar Usman, a BDC operator in Lagos, is due to a shortage of forex supply, while demand has risen sharply in recent weeks.
He said, “Dollar demand has increased significantly, especially since the election is fast approaching, which is why the exchange rate has gone up.”
Politicians competing for support from delegates in the party primaries are creating massive demand for dollars in cash, Usman said by phone. “Demand is not going to abate soon, which means more pressure for the naira, and also because dollar supply is very low,” he said.
Idayat Hassan, director of the Abuja-based Centre for Democracy and Development stated that Politicians in Nigeria have a history of buying votes at party primaries going as far back as the 1993 elections.
He said, “I think we’re just seeing the beginning of the rise of the dollar because as we move closer to the primaries and the parties are trying to put their houses in order, the value of the dollar will also trade up.”
Nigeria’s external reserve fell further below the $39 billion threshold on Tuesday as the level recorded a 0.09% decline to stand at $38.88 billion from $38.92 billion recorded as of the previous day.
The decline in the external reserve level can be attributed to the continuous intervention by the Central Bank in the FX market to ensure the stability of the local currency.