Last year, the exchange rate was stable at 730 Naira to $1, mirrored in the Binance P2P market where USDT was pegged at the same rate. So, what changed within a year to cause a 60% depreciation of the Naira? There are two main reasons:
- President Tinubu’s miscalculation.
- Greedy speculators.
Exploration of Factors
In June last year, the government took a bold step to unify the official FX rate with the parallel market by floating the Naira—a move that required a solid backup plan for potential volatility which was absent. This oversight was exploited by speculators, leading to the Naira’s steep decline.
Explanation
The dynamics haven’t changed significantly: the same entities buying dollars last year are buying this year. The NNPC’s dollar remittances to the CBN haven’t resumed, and there’s no external invasion demanding dollars to justify the Naira’s fall. The situation with the CBN and dollar supply has improved since last December, not worsened. Nigeria even attracted over $1.8 billion from capital importation in just two weeks, despite banks’ reluctance to sell dollars last year. This researcher’s personal experience highlights the inconsistency in dollar availability and pricing.
Binance Speculators
Before 2020, Binance’s P2P market wasn’t a mainstream platform for currency exchange. However, the ban on Crypto in February 2020 by Emefiele turned the P2P market into a primary channel for buying USDT. The demand for USDT surged in 2020, especially during the crypto bull run, yet the Naira remained stable at 450 to $1. The current rise in the dollar rate on Binance, without any fundamental demand, is puzzling. South Africa, with a larger P2P market volume than Nigeria, maintains a stable currency, contrasting with the Naira’s depreciation.
Manipulation in the Market
A recent observation on Binance revealed traders manipulating the Naira price without any substantial demand to back it up. The rate spiked from 1700 to 1850 in just a few hours, orchestrated by a few traders. This manipulation also influences the rates set by BDC sellers on the streets.
The True Value of the Naira
The actual value of the Naira should be between 650 and 800 to $1, based on last year’s exports and the money in circulation. The current buying rate of 1,900 to $1 is inflated due to slow market adjustments.
The Way Forward
The government needs to acknowledge the failure of its floating policy and adopt a managed float system, pegging the exchange rate within the 650–800 range. Coordination between the Minister of Finance, Wale Edun, and the CBN Governor, Cardoso, must improve to combat speculation effectively. Speculation on Binance is highly profitable, but without intervention, it could drive the Naira’s value down further, potentially leading to economic instability.
The government must act swiftly to prevent speculative activities from causing more harm. The responsibility lies with the authorities to stabilize the economy and safeguard it against speculative forces.
Edited, originally written by Chukwudi Iwuchukwu.
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