Why gap between official, parallel rates may increase rates
The naira has recently shown a modest but noteworthy recovery, appreciating to N1,350/$ in the official market and N1,440/$ in the parallel market at the weekend. Despite this appreciation, analysts
The naira has recently shown a modest but noteworthy recovery, appreciating to N1,350/$ in the official market and N1,440/$ in the parallel market at the weekend.
Despite this appreciation, analysts expressed concerns over rising gaps between official and parallel market rates.
Managing Director, Financial Derivatives Company Limited, Bismark Rewane, explained that even amid this improvement, the gap between the official and parallel rates has persisted at N90, a reflection of underlying market frictions.
“This divergence stems from lingering supply-demand imbalances, heightened speculative activity, and uneven access to foreign exchange, especially for smaller end users who frequently turn to the parallel market,” he said in emailed note to investors.
Country Director, World Bank in Nigeria, Mr. Mathew Verghis, said the critical issue in exchange rate is not necessarily the rate at which the naira is exchanged against the dollar or other global currencies, but the gap between official and parallel market rates.
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The central Bank of Nigeria (CBN) has however, taken key steps to bridge the gaps.
The apex bank recently took a decisive step to bolster foreign exchange (forex) liquidity, authorizing the weekly sale of up to $150,000 to each licensed Bureau De Change.
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By directly increasing dollar availability to retail FX intermediaries, the move aims to ease pressures for legitimate end users. The intention is clear: as supply rises and speculative demand moderates, the gap between official and parallel rates could narrow.
“However, the intervention is far from a panacea. While increase in dollar supply may soften immediate pressures, volatility is likely to persist amid mounting uncertainty. Key risks including the possibility of oil prices dipping below $60 per barrel and cocoa prices plunging under $4,000/ton — continue to cast shadows over market stability. In such an environment, sustainable convergence between the official and parallel markets will hinge on consistent FX supply,” Rewane said.
Rewane had earlier estimated the fair value of the naira at about N1,257 to the US dollar.
He posits that the local currency is undervalued by approximately 11 per cent when assessed using the purchasing power parity (PPP) model.
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He noted that currencies typically converge towards their PPP-implied values over a five-year horizon.
According to him, the appropriate exchange rate based on current PPP estimates stands at N1,256.79 to the dollar, reinforcing the view that the naira remains below its fair valuation level.
President, Association of Bureaux De Change Operators of Nigeria (ABCON), Aminu Gwadabe, said the naira has remained stable across market for several months, ending years of volatility in the market.
The CBN under its Governor, Olayemi Cardoso is cultivating multiple FX sources to increase dollar inflows, boost dollar access to manufacturers and retail end users.
From moves to improve diaspora remittances through new product development, the granting licenses to new International Money Transfer Operators (IMTOs), implementing a willing buyer-willing seller FX model, and enabling timely access to naira liquidity for IMTOs, the apex bank has simplified dollar-inflow channels for authorized dealers and other players in the value chain.
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The move has led to substantial accretion to the gross FX reserves and supported the stability of the naira.
Given that FX inflows to the economy are strategic in achieving monetary and fiscal policy stability, the CBN under Cardoso puts in a lot of efforts in attracting more inflows into the economy.
Diaspora remittances to Nigeria, estimated at $23 billion annually remain a reliable source of forex to the domestic economy. There are also other sources and policies that are being explored by the apex bank to keep dollar inflows coming.
The CBN’s initiatives have supported continued growth in these inflows, aligning with the institution’s objective of doubling formal remittance receipts within a year.
The remittances in the economy is expected to increase based on CBN’s ongoing efforts to bolster public confidence in the foreign exchange market, strengthen a robust and inclusive banking system, and promote price stability, which is essential for sustained economic growth.
