Banking

Why Naira to Dollar Exchange Rate is Crashing at the Black Market

The black market naira to dollar exchange rate has made a surprising U-turn trading at almost #700/$ in recent days after trading at a high of #900/$ just last week.

But analysts say these gains may not hold up for long, and we might even begin to see a reverse any time from now.

To understand why it is important to understand how the parallel market works and how the exchange rate is determined in the black market.

The black market rate in Nigeria is determined by market sentiment of supply and demand, if plenty of people are demanding the dollar, the price goes up and vice versa. The market in recent days has seen a surge in dollar supply is the reason why the exchange rate is falling now, here’s how.

Reasons for the crash

EFCC raid on BDCs

Throughout last week, EFCC officials raided the offices of bureau de change merchants in Abuja, Lagos, Kano and other major cities over allegations of currency hoarding and helping politically exposed persons to exchange their naira for dollars before the January 31, 2023 deadline when the CBN said old naira banknotes will cease to become legal tender in the country.

These raids forced most of the BDC operators to go underground, this move forced politically exposed persons to hold back their demands for the greenback. The huge demand that pushed up the exchange rate disappeared almost instantly.

Expiring dollar bill rumour

Following the announcement that the CBN has concluded plans to phase out the country’s 200, 500 and 1000 naira banknotes by January 31, 2023. Some people began peddling the rumour that the US Federal Reserve is planning a similar move with the dollar.

These unfounded rumours caused panic in the market with people who have the greenback selling before any possible expiration date. Though the rumour was false, it caused the market to be flooded with dollars in a very short period

Crash in the crypto market

Earlier this week, Binance, the world’s largest cryptocurrency exchange, backed out of its decision to purchase faltering cryptocurrency exchange FTX.COM.

Binance said the decision to pull out of the deal was as a result of corporate due diligence and information that regulators were investigating issues of mishandling of investor funds.

This news led to a bloodbath in the crypto market. Bitcoin prices fell 15% to $15.7k on Wednesday as investors liquidated millions of tokens in investments. A total of $200 billion was reportedly wiped off crypto markets within the week.

Nigerians are among the largest crypto holders in the world, and the rush to liquidate tokens meant millions of dollars came into the country as holders try to cut their losses.

BRICS attempt to replace the dollar

The US dollar is the world’s reserve currency, and about 65% of global trade is performed in dollars. But countries in the BRICS organization comprising Brazil, Russia, India, China and South Africa announced that they plan to develop a new currency that will replace the dollar in global trade.

This news is also affecting the confidence that people have in the US dollar remaining the world’s reserve currency in the long term.

Bottomline

A combination of factors both local and international have helped the naira make some gains against the dollar in the black market. But these gains might not hold for long as the underlying factors that weakens the naira are still there.

The fact that Nigeria imports almost everything and doesn’t export anything valuable. Nigerians still spend over $ 1 billion on medical tourism every year. Thousands of Nigerians still leave the country every year due to rampant insecurity and to seek greener pastures abroad. Unless these factors are addressed, the naira to dollar exchange rate might sink to #1000/$ soon.

Ismaeel

Statistician with interests in finance, risk management, loan products and market surveys. I also write on crypto currencies, Forex and a variety of financial instruments.

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