Despite Nigeria’s external reserves growing by 8.36% in the past year following the surge in remittances and international financial inflows, the naira continues to lose value against the U.S. dollar, declining by 50.80% over the same period.

According to the Central Bank of Nigeria (CBN), the country’s foreign currency reserves rose to $36.79 billion by July 31, 2024, up from $33.95 billion recorded the previous year.

This has been driven by a surge in remittances and various international support packages, including a $3.3 billion AfreximBank oil facility and $2.25 billion from the World Bank Group.

The CBN reported that total direct remittance inflows increased by 129.46% to $553 million in July 2024, compared to $241.22 million in July 2023.

Remittances had similarly climbed by 22.66% in the prior year, reflecting the importance of diaspora funds in boosting Nigeria’s foreign exchange reserves.

Despite these gains, the naira has faced severe depreciation. At the Nigerian Autonomous Foreign Exchange Market (NAFEM), the currency tumbled from N791.42 per dollar in July 2023 to a staggering N1,608.73 per dollar as of July 2024.

In the parallel market, the naira’s performance was similarly poor, dropping from N867 per dollar in 2023 to N1,610 per dollar by July 2024.

The CBN has attributed the pressure on the naira to a combination of factors, including reduced availability of U.S. dollars and rising demand for foreign currency for personal and commercial transactions.

Nigeria has seen a massive surge in demand for foreign exchange to fund education, healthcare, and personal travel, further straining its reserves. Over the past decade, demand for dollars for these sectors reached nearly $40 billion.

In addition to remittances, Nigeria has also benefited from a rise in capital importation and foreign direct investment (FDI), which have collectively pushed net foreign exchange inflows to $25.4 billion in the first half of 2024 — a 55% year-on-year increase.

Despite the increase in reserves, experts argue that Nigeria’s efforts to stabilize the naira have been insufficient.

Charlie Robertson, head of macro strategy at FIM Partners, pointed out that Nigeria’s currency and interest rate dynamics are attracting investors, but at a modest rate compared to other nations like Egypt, which has secured over $20 billion in foreign investments in the same period.

Robertson also highlighted that while Nigeria’s approach focuses on improving trade balance without external financial aid, the lack of sufficient external support has created vulnerabilities that leave the naira exposed to continued depreciation.

While the CBN remains hopeful that ongoing policy reforms and inflows from diaspora remittances will eventually stabilize the currency, analysts remain cautious.

The demand for dollars far outweighs the supply, creating a vicious cycle that continues to erode the naira’s value.

As the US Federal Reserve signals potential interest rate cuts, there is growing optimism that Nigeria’s struggling naira could receive a much-needed boost.

The Federal Reserve Chair, Jerome Powell, hinted at a possible rate reduction during the Jackson Hole Symposium on August 23, 2024, suggesting that the time for policy adjustment may be near.

Since the Central Bank of Nigeria (CBN) floated the naira in June, allowing market forces to determine its value, the currency has lost nearly 100% of its value, creating immense economic pressure on the country.

Inflation has soared to 33.40% as of July 2024, and the cost of living for millions of Nigerians has worsened.

However, Powell’s suggestion of a shift in US monetary policy has triggered a wave of optimism in global financial markets, potentially offering some relief for Nigeria’s currency.

A rate cut from the US Federal Reserve would weaken the dollar, potentially easing the downward pressure on the naira.

This move is seen as an opportunity for emerging markets, including Nigeria, to experience more favorable exchange rates. As the dollar becomes less attractive to investors, currencies such as the naira could stabilize or even strengthen.

Ibrahim Bakare, a professor of Economics at Lagos State University, said, “A weaker dollar could help ease some of the pressures on the naira. Lower US interest rates make the dollar less appealing, leading to depreciation, which could allow the naira some breathing space.”

Market experts have also expressed hope that this shift in US monetary policy could lead to increased foreign investment in Nigeria. Lower interest rates in the US often push investors to seek higher yields in emerging markets.

As Nigerian assets become more attractive, increased demand for the naira could help stabilize the currency.

“If the Federal Reserve cuts rates, we could see a shift in capital flows towards markets like Nigeria, supporting the naira and easing the current currency depreciation,” said a Lagos-based investment banker.

Despite these positive projections, the road ahead remains uncertain. The naira closed at 1,570.14 per dollar on Friday, according to the Nigerian Autonomous Foreign Exchange Market (NAFEM), showing little improvement despite CBN interventions, including the sale of $815 million to businesses in early August to boost dollar liquidity.

The Central Bank’s hawkish stance, maintaining an interest rate of 26.75%, aims to contain inflation but has done little to reverse the naira’s sharp decline.

Many economists believe the Fed will reduce rates by 25 to 50 basis points in upcoming meetings in September and December. While this presents a hopeful outlook, the pace and timing of these cuts remain critical to the naira’s future trajectory.

“The Fed’s policy adjustment could bring relief, but the impact will depend on the speed and scale of their rate cuts,” said Tobi Ehinmosan, a macroeconomic analyst at FBNQuest Capital.

He cautioned that while a weaker dollar could stabilize the naira, sustained improvements in Nigeria’s foreign exchange market are needed to achieve lasting change.

In addition to exchange rate stabilization, a rate cut by the Fed could also have broader economic benefits for Nigeria. As imported goods become cheaper with a weaker dollar, inflationary pressures might ease, offering relief to Nigerian consumers who have been grappling with high costs.

Samuel Sule, CEO of Renaissance Capital Africa, stated, “If the dollar weakens, we could see lower prices for imported goods, providing some respite to consumers and contributing to a more stable inflation rate.”

Though hopes are high, analysts stress the importance of Nigeria addressing its own economic challenges, including foreign exchange liquidity and policy consistency. While the potential for a stronger naira is on the horizon, the CBN will need to maintain its interventions and ensure that the supply of foreign currency is adequate to meet demand.

As of August 26, 2024, the dollar to naira exchange rate on the black market, also known as the parallel market or Aboki FX, is reported at 1 USD to ₦1,610.

This rate reflects a snapshot of the Nigerian Naira’s value against the US dollar outside the official or regulated exchange channels.

Current Black Market Rates

In Lagos, a key hub for currency trading, the Bureau De Change (BDC) reports that buyers are acquiring US dollars at ₦1,605 and selling them at ₦1,595 as of August 20, 2024.

This data indicates a decline in the exchange rate compared to today’s black market rate of ₦1,610.

Role of the Black Market in Currency Dynamics

The black market rate provides valuable insights into the immediate value of the Naira, offering a real-time reflection of currency dynamics that can be particularly useful for investors and individuals involved in forex trading.

Although not officially recognized by the Central Bank of Nigeria (CBN), the black market plays a crucial role in understanding market sentiment and currency value fluctuations.

Official CBN Guidelines

It is important to remember that while the black market can offer immediate insights, the Central Bank of Nigeria (CBN) does not officially endorse it.

The CBN advises individuals to use official banking channels for forex transactions, underscoring the importance of adhering to regulatory frameworks to ensure stability and transparency in currency exchange.

Exchange Rates Summary

For those involved in currency exchange, the latest figures for the black market are:

• Buying Rate: ₦1,610
• Selling Rate: ₦1,600

Conclusion

As economic conditions and forex policies continue to evolve, staying informed about exchange rates is essential for making sound financial decisions. The black market provides a useful, though unofficial, gauge of currency value, while official channels ensure regulatory compliance and market stability.