According to research by Bloomberg, when compared to the US Dollar, the Naira outperformed the Canadian dollar this year making it one of the best-performing currencies of 2022.
Any Nigerian will be shocked by the news until you realize that it is in reference to the official exchange rate. On the parallel market, where most Nigerians are actually able to source foreign exchange, the going rate as at 6th of November is 890 Naira to a dollar, a 37 per cent drop compared to the official figure which indicates a 4 per cent drop.
The black-market rate which Bloomberg cites is more reflective of the actual state of the Naira because that’s the rate a large portion of Nigerians get US Dollars, puts the Naira among the worst-performing currencies of the year alongside the Cedi and the Sri Lankan Rupee.
You know things are bad when your currency is been put side by side with that of a country that is currently going through an economic crisis.
So what?
To be fair to the Naira, the whole world is facing depreciation pressures against the Dollar, the global inflation pressures caused by supply chain bottlenecks and the war in Ukraine have triggered inflation in most countries of the world, well, except in Belarus where they apparently ban inflation (lol).
The issue is that Nigeria operates a semi-fixed exchange rate with strong capital controls (official forex window), these controls create a situation where people have difficulty getting Naira at the official rate and this has led to the development of a parallel or black-market (unofficial window).
Because the black market is where most economic entities in Nigeria get their foreign exchange, the price in the black market reflects their actual cost, not the official rate. This means that no matter the efforts of the central bank if the cost of US Dollars in the black-market keeps rising, imported input factors will continue to increase cost leading to higher prices of finished goods leading and inflation.
Various international bodies have called on the CBN to harmonize the windows (i.e. get rid of the official window and operate at the free market which is currently the black market). The logic is that doing that will help them tame the deprecation of the Naira and reduce the capital cost. In the short term, it will work as it will increase liquidity in the market but going forward the only way to maintain exchange stability is to increase domestic production capacity especially the export sector and Nigeria has a long way to go in that regard.