The naira plunged to a record low of N900/$1 on the parallel market on Tuesday, August 8, 2023, as demand for foreign currency outstripped supply.
Forex traders, who quoted the exchange rate as high as N900/$1 for “inflows” and N895/$1 for cash trades.
The peer-to-peer market, where cryptocurrency traders exchange forex, also saw the exchange rate soar above N900/$1.
Meanwhile, in the official Investor and Exporter Window, the exchange rate closed at N774.78/$1 while the NAFEX rate was N776. The official market also faces supply constraints, with daily turnover averaging $80 million since July.
The exchange rate between the naira and dollar has weakened by 16% since the reunification of the exchange rate windows. This compares to a depreciation of 2.5% between January 1 and June 14th (before the unification). The exchange rate weakened by 22.9% in the whole of 2022.
The naira has been under pressure in the parallel market for several weeks, as the supply of forex from official sources remains inadequate. On July 1st, the beginning of the second half of the year, the exchange rate in the parallel market was around N772/$1.
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However, a surge in demand from various segments of the economy, such as importers, foreign travellers and speculators, has triggered exchange rate volatility.
Forex traders who attributed the depreciation of the naira to a scarcity of supply, said that there were more buyers than sellers in the market and that the situation was unlikely to improve anytime soon.
When asked about the source of the increased demand, traders mentioned a diverse set of buyers, including importers, foreign travellers, and speculators.
There are concerns among some traders that the state of depreciation is unlikely to improve as demand continues to rise unchecked.
Forex analysts explained that there was a huge backlog of unmet forex demand in the official market, estimated at $8-10 billion.
Some of this demand also spills over to the parallel market, as buyers struggle to find enough supply to meet their needs in the official market.