Exchange Rate Naira falls to N500/dollar as foreign reserves grow

Nigeria's foreign reserves climb to 27.9 billion dollars but the naira continues to fall in the parallel market.

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The value of the naira plunged to 500 naira to one dollar yesterday, despite a boost in Nigeria's foreign reserves, which increased by 450 million dollars over the last one week.

That increase has brought the total value of the country's reserves to 27.9 billion dollars, and while it was expected to have a positive effect on the strength of the naira, the exchange rate has instead fluctuated between 480 and 498 naira to the dollar in the last 60 days.

This steady decline in the value of the naira has caused an increase in the price of goods and services, especially in markets where dollar-based imports are vital.

It also highlights the failure of the government's attempts to handle the forex crisis, raising the possibility of further devaluation of the naira.

The CBN interbank rate stands at 305.25 naira to the dollar, while certain bureau de change operators have it quoted at 386.65 naira to the dollar on their websites.

Godwin Emefiele play CBN Governor, Godwin Emefiele insists that the current forex policies will solve the crisis. (REUTERS/Afolabi Sotunde)

 

Experts have predicted this decline for a while, and many believe a dollar might still exchange for 1000 naira at this rate.

Solutions have been suggested and many, including Professor Pat Utomi believe, as he says, that this crisis represents an opportunity for Nigeria to raise production of substitutes.

However the main symptom of the crisis is a shortage of forex in markets and for Kunle Ezun of Ecobank, that demand is more important than what the government has in its coffers.

According to him, "the reserves could be growing geometrically, but how much of it is available in the market? If it is at the same level of supply, it will be as though there is scarcity. So the percentage available to satisfy demand will always be the difference,".

The volume of foreign exchange released by the CBN is not enough to meet the demand for products and services and until that demand is met, the parallel or 'black market' will continue to be the alternative for importers, businesses and the average consumer.

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The only alternative for the CBN is to devalue again with the view of reducing the interbank - parallel market gap, according to Lukman Otunuga.

This will also project the impression that Nigeria is in control of its fiscal policies, especially as the situation has destroyed investor confidence and resulted in unemployment and inflation levels that the country is expected to deal with in 2017.

Otunuga, who is currency and research analyst at FXTM believes that while devaluation will affect prices in the short run, they will normalise with time.

"Everything is not just normal for the country" he says, "Remember, the positive outlook for the country by the world bank and International Monetary Fund is only anchored on oil price rebound and fixing of the exchange rate, Nigeria is still behind the 2.2 million barrels per day benchmark"

The chances that Nigeria's output will increase have taken a blow by recent threats of unrest by militants in the oil-rich Niger Delta.

This comes as the world's biggest importers look to alternative sources of energy to supplement their crude consumption.

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