Forex traders have linked the worsening volatility of the naira at the parallel market to what they describe as fiscal indiscipline and overlapping budget cycles by the Federal Government, raising fresh concerns about liquidity pressures and confidence in Nigeria’s foreign exchange market.

Insights from currency traders and market operators indicate that weak fiscal discipline continues to undermine the local currency through excessive government spending and the running of multiple overlapping budgets. According to them, these practices inject surplus naira liquidity into the financial system without a corresponding increase in productivity or foreign exchange inflows, thereby destabilising the currency.

They explained that the excess liquidity eventually finds its way into the foreign exchange market as individuals and businesses convert naira holdings into dollars as a hedge against uncertainty. This trend, they said, increases demand for the United States currency and places further pressure on the exchange rate. The traders also insisted that such leakages and diversions are channelled into currency substitution, gratifications, hoarding and similar activities.

The situation has heightened concerns around transparency in fiscal management and the broader implications for Nigeria’s forex market. The traders had earlier questioned what they termed the over-appreciation of the naira at the official market without supporting economic fundamentals, noting that the local currency continues to depreciate at the black market.

They maintained that as long as fiscal leakages persist and unregulated channels continue to serve as conduits for diverting forex liquidity into the economy, pressure on the parallel market will remain, further driving exchange rate movements.

A senior member of the Association of Bureau De Change Operators of Nigeria, who spoke on condition of anonymity, shed more light on the issue, stating, “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, also attributed the strain in the forex market to government fiscal behaviour. He 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 stressed that such excess liquidity, which is not supported by productivity gains or forex inflows, ultimately fuels demand for dollars and further weakens the naira.

Recent data highlights the widening gap between official and parallel market rates. The naira traded at N1,341.01 per dollar at the official market and N1,390 per dollar at the parallel market, creating a disparity of N49. This represents an increase from the N44.75 gap recorded the previous week and N21.50 in the preceding month.

Market operators linked the widening disparity to rising demand for foreign exchange driven by hedging behaviour and speculative activities. They added that the surplus naira liquidity circulating within the system is increasingly being channelled into the forex market, intensifying pressure on limited dollar supply.

Further compounding concerns, a World Bank report revealed that 41 per cent of the N84 trillion revenue generated over the past three years was deducted before reaching the federation account. The revelation has sparked debate over fiscal transparency and revenue management.

The World Bank noted that although economic reforms such as the removal of petrol subsidy and foreign exchange adjustments have boosted government revenue, the current fiscal system automatically diverts a significant portion of these gains to various agencies through collection charges and statutory transfers. The deductions, it said, are so substantial that some government agencies receive more funding than the total revenues of several Nigerian states.

According to the report, these deductions significantly reduce the funds available for development despite increased revenue inflows arising from recent reforms.

However, the Federal Government has rejected claims of hidden spending and revenue diversion arising from interpretations of the World Bank report. The Minister of State for Finance, Taiwo Oyedele, clarified in a statement that the claims were based on a misinterpretation of the World Bank’s Nigeria Development Update, particularly concerning Federation Account Allocation Committee deductions and fiscal flows.

Oyedele explained that these deductions are legitimate and form part of Nigeria’s established fiscal framework. He stated on behalf of the Federal Ministry of Finance that recent media reports had incorrectly portrayed FAAC deductions as “hidden spending” or “missing funds,” stressing that all such deductions are properly documented within the federation account system and do not constitute diversion of funds.

He further emphasised that all deductions are transparent and accounted for, dismissing suggestions of mismanagement.

Meanwhile, the naira recorded a marginal improvement at the official market, closing at N1,342.5 per dollar, supported by improved global sentiment and a weaker United States dollar. Despite this slight gain, analysts warn that persistent volatility in the parallel market reflects deeper structural challenges, including fiscal management issues, liquidity constraints and declining market confidence, all of which must be addressed to achieve lasting currency stability.