World Bank Reveals Why Parallel Forex Market Thrives In Nigeria

World Bank Reveals Why Parallel Forex Market Thrives In Nigeria

The World Bank has attributed the resurgence of a parallel currency exchange market in Nigeria to resistance against the mounting pressure on the naira and the restricted supply of foreign exchange through official channels.

According to a report released in Washington DC on Wednesday, the gap between the parallel exchange rate and the official rate widened from March 2020 until June 2023.

Despite adjustments made to the official exchange rate in 2021 to better align with market conditions, Nigeria continued to operate with multiple currency practices. This led to a steady increase in the premium of the parallel rate, reaching 80 percent in November 2022 and then approximately 60 percent in June 2023. This trend persisted as the Central Bank’s attempts to limit foreign exchange demand and artificially maintain a low exchange rate faced dwindling foreign exchange supply from oil revenues.

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The report noted that the prioritization of specific sectors and the imposition of price ceilings and trade restrictions prompted transactions to shift towards the parallel market. This market increasingly accounted for a significant portion of foreign exchange transactions in the country, including those for remittances, tourism, and non-oil product exports.

Following the unification and liberalization of exchange rates in June 2023, the NAFEX rate converged with the parallel rate, closing the gap. However, resistance against the mounting pressure on the Nigerian naira, combined with the limited supply of foreign exchange through official channels, has led to the re-emergence of a premium in the parallel market.

The report, titled “Africa’s Pulse,” paints a bleak economic outlook for Sub-Saharan Africa. It identifies growing instability, weak growth in the region’s major economies, and lingering uncertainty in the global economy as factors dragging down growth prospects.

The report forecasts economic growth in Sub-Saharan Africa to decelerate to 2.5 percent in 2023, down from 3.6 percent in 2022. Nigeria and Angola are projected to grow at 2.9 percent and 1.3 percent, respectively, due to lower international prices and currency pressures impacting both oil and non-oil activities.

It highlights that increased conflict and violence in the region are weighing on economic activity, with this fragility potentially exacerbated by climatic shocks. In Sudan, economic activity is anticipated to contract by 12 percent due to internal conflict, which has halted production, eroded human capital, and weakened state capacity.

The World Bank’s Chief Economist for Africa, Andrew Dabalen, emphasized that the region’s poorest and most vulnerable continue to bear the brunt of the economic slowdown. Weak growth translates into slow poverty reduction and poor job growth, he noted. With up to 12 million young Africans entering the labor market each year across the region, the urgency for policymakers to transform their economies and deliver growth through better job opportunities has never been greater.

Despite the grim outlook, the report identified a few bright spots. Inflation is projected to decrease from 9.3 percent in 2022 to 7.3 percent in 2023, and fiscal balances are improving in African countries pursuing prudent and coordinated macroeconomic policies.

In 2023, the Eastern African Community (EAC) is expected to grow by 4.9 percent, while the West African Economic and Monetary Union (WAEMU) is set to grow by 5.1 percent.

However, the report cautioned that debt distress remains widespread, with 21 countries at high risk of external debt distress or already in debt distress as of June 2023.

Overall, current growth rates in the region fall short of creating sufficient high-quality jobs to meet the rising working-age population. Current growth patterns only generate three million formal jobs annually, leaving many young people underemployed and engaged in casual, piece-rate, and unstable work that fails to fully utilize their skills.

The World Bank emphasized that creating job opportunities for young people will drive inclusive growth and harness the demographic potential of the continent into an economic dividend. This calls for an ecosystem that fosters private-sector development and firm growth, along with skill development that aligns with business demand.

The report identified several policies to overcome barriers and unleash job creation in Sub-Saharan Africa.

These include cost-effective private sector reforms focused on enhancing competition, uniform policy enforcement across firm sizes, and regulatory alignment with regional trading partners. Governments can also play a role by identifying and supporting early-stage business growth through more inclusive procurement practices and promoting local businesses abroad. Additionally, investment in education is crucial to bolster semi-skilled occupations in the region. Interventions that improve learning outcomes in schools are more effective than solely increasing school attendance. Vocational education can also address underemployment for those who have missed out on formal education. Empowering girls with education and access to jobs can reduce potential productivity losses from the misallocation of female labor. Cash transfers have also proven effective in increasing girls’ school enrollment and attendance while curbing pregnancies among school-age girls.

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