Officially, Nigeria’s naira is doing pretty well this year, down just 4% against a strong US dollar, ahead of the Canadian dollar and the Swiss franc. But that exchange rate is used only by the government — ordinary Nigerians are grappling with a 37% drop on the widely-used black market.
That makes it one of the world’s worst-performing currencies, after Ghana’s cedi, which is down nearly 55% this year, and the Sri Lankan Rupee. Its peers include Sierra Leone’s leone, which is down 36%, and the Egyptian pound, which has lost 35%.
Africa’s largest economy operates a tightly controlled official rate but it’s in the parallel market where the exchange rate of the local currency is largely determined by the level of demand for the dollar.
Nigeria’s central bank rations dollars at the official rate, cutting off access to many businesses and individuals, which in turn drives demand to the unauthorized black market. This has led to a widening gap between the managed and parallel markets to more than 90%.
The local unit’s drop in the black market started a day after the central bank announced last week that it will issue redesigned 200-, 500- and 1,000-naira notes from mid-December in a bid to mop up excess cash in circulation.
The Abuja-based regulator gave Nigerians until Jan. 31 to exchange the existing bills for new ones, a tight deadline considering that the central bank estimates that as much as 2.7 trillion naira ($6.1 billion) sits outside bank vaults. Africa’s most populous country has an average of 4.5 bank branches per 100,000 people and 45% of adults don’t have a bank account.
The naira’s slump is likely to continue in the near term given low oil revenue and rising outflows due to uncertainties associated with February’s presidential election, said Uche Uwaleke, a professor of finance and capital markets at the Nasarawa State University in central Nigeria. The dollar is seen as a safe haven, he said.
“It’s evident that a lot of currency substitution is going on as many people now see the greenback as a better store of value,” Uwaleke said.