Forex traders have attributed the worsening volatility of the naira at the parallel market to fiscal indiscipline and overlapping budget cycles by the Federal Government.
This is according to insights from currency traders and market operators who spoke to Nairametrics.
They said that the lack of fiscal discipline weakens the naira through excessive spending and overlapping budget cycles, which create excessive naira liquidity in the system, not backed by a corresponding increase in productivity or forex inflow.
They said this surplus eventually finds its way into the foreign exchange market as people and businesses convert it into dollars, a preferred store of value, thereby putting more pressure on the exchange rate.
They also insisted that these leakages and diversions are used for currency substitution, gratifications, and hoarding, among others.
The development underscores growing concerns over liquidity pressures, policy transparency, and confidence in Nigeria’s foreign exchange market.
These forex traders had earlier questioned what they called the over-appreciation of the naira at the official market, without corresponding fundamentals, while the local currency keeps falling at the black market.
They noted that as long as there are fiscal leakages and proliferation of ungoverned spaces that are used as a conduit for diversion of forex liquidity into the economy, the black market will continue to be under pressure as well as drive the movement of the exchange rate.
What they are saying
Forex traders say weak fiscal discipline and budget overlaps are key drivers of pressure on the naira in the black market.
A senior member of the Association of Bureau De Change Operators of Nigeria (ABCON), who does not want to be mentioned, gave an insight into where these leakages are diverted to. He said, “They are diverted for currency substitution, gratifications, hoarding, etc., as people prefer dollars over naira as a store of value.”
He added, “Overlapping of multiple budgets breeds concerns over transparency and accountability. Speculative and arbitrage activities on a nation’s local currency thrive in the lack of fiscal policy transparency and accountability.”
Another forex trader, Umar Barkinzuwo said, “For me, the strain on the foreign exchange market can be closely tied to the government’s fiscal behaviour. When fiscal discipline weakens—through excessive spending, delayed budgets, or the running of overlapping budget cycles—it creates excess liquidity in the system.
‘’That surplus naira, not backed by a corresponding increase in productivity or foreign inflows, inevitably finds its way into the foreign exchange market. People and businesses begin to convert naira to dollars as a hedge against uncertainty, especially when budget implementation is inconsistent or unclear.’’
The traders noted that this excess liquidity, not backed by productivity or forex inflows, ultimately fuels demand for dollars and weakens the naira further.
More insight
Recent data shows the exchange rate stood at N1,341.01 per dollar at the official market and N1,390 per dollar at the parallel market, creating a disparity of N49, up from N44.75 recorded last week and N21.50 the previous month.
Traders linked the widening gap to increased demand for foreign exchange driven by hedging behaviour and speculative activities.
The surplus naira liquidity in the system is said to be channelled into the forex market, intensifying pressure on available dollar supply.
A World Bank report revealed that 41% of the N84 trillion revenue generated over the last three years was deducted before reaching the federation account, raising concerns over fiscal transparency.
World Bank noted that while economic reforms like the removal of the petrol subsidy and forex adjustments boosted government revenue, the current system automatically diverts these gains to various agencies, in the form of collection charges and statutory transfers.
The scale of these deductions is reported to be so massive that several individual government agencies received more funding than the total revenue of many Nigerian states.
The World Bank noted that these deductions significantly reduce the funds available for development, despite higher revenue inflows following reforms such as subsidy removal and exchange rate adjustments.
FG denies World Bank claim
However, the Federal Government had, in its clarification, refuted claims of hidden spending in federation revenues as alleged in interpretations of a recent World Bank report.
The Minister of State for Finance, Taiwo Oyedele, had, in a statement, explained that the claims stem from a misinterpretation of the World Bank’s Nigeria Development Update, particularly regarding Federation Account Allocation Committee (FAAC) deductions and fiscal flows, which it said are legitimate and transparent.
Oyedele, on behalf of the Federal Ministry of Finance, stated that recent media reports had wrongly framed FAAC deductions as “hidden spending” or “missing funds,” emphasizing that these deductions are part of Nigeria’s established fiscal framework.
He stressed that all such deductions are properly documented within the federation account system and do not represent diversion of funds.
What you should know
The Federal Government has rejected claims of hidden spending and revenue diversion raised from interpretations of the World Bank report.
Minister of State for Finance, Taiwo Oyedele, clarified that FAAC deductions are legitimate and part of Nigeria’s established fiscal framework.
He stressed that all deductions are properly documented and do not represent missing or diverted funds.
Meanwhile, the naira showed marginal improvement at the official market, closing at N1,342.5 per dollar, supported by improved global sentiment and a weaker U.S. dollar.
Despite this, analysts warn that sustained volatility in the parallel market reflects deeper structural issues, including fiscal management, liquidity constraints, and market confidence, which must be addressed to stabilise the currency.
Chike was a banker with over 11 years of experience in retail and commercial banking, risk management, treasury portfolio management and relationship management.
