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Forex Shortages Force Nigerian Corporates to Turn to Parallel Market

Nigeria’s ongoing shortage of foreign exchange is forcing corporates and businesses to source this resource on the parallel market, a former official with the Lagos Chamber of Commerce and Industry (LCCI) has said. According to Muda Yusuf, who is the previous director-general at LCCI, these shortages stem from the foreign exchange market liquidity constraints that have been experienced in the first half of 2021.

Investment Risk

As noted in a report based on data from July 8, 2021, the turnover at one of Nigeria’s multiple official forex markets dropped by 24.5% to $526.79 million. The report adds that most of these trades were consummated at the exchange rate of “between N400 and N460 to the dollar.” In contrast, the Nigerian naira’s parallel market exchange rate currently stands at N505 per dollar according to Abokifx.

In his remarks, while speaking at the Finance Correspondents Association of Nigeria (FICAN) forum, Yusuf warned that such foreign exchange shortages could negatively impact the country’s banking system. Yusuf explained:

Foreign exchange illiquidity aggravates investment risk which could negatively impact asset quality in the banking system. Foreign currency-denominated loans account for between 30 per cent and 35 per cent of banks’ loan books. Foreign exchange volatility is associated with risks relating to asset quality and financial stability.

Conducive Business Environment

The report quotes Yusuf arguing the case for a conducive business climate which he insists will “create more avenues for investment” for financial institutions. In addition, more profitable asset classes will be needed for such profitable investments to take place, he said.

Additionally, Yusuf is also quoted stressing the “need to address the structural, policy, institutional and regulatory constraints in the business environment which would also result in a reduction in non-performing loans in the banking sector.”

What do you think Nigeria needs to do to end foreign exchange shortages? Tell us what you think in the comments section below.

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