There are very few people who can say they have not heard about what is done in the Nigerian parallel market. This black market has been.
Right from the time of Nigeria’s first finance minister Chief Okotie Eboh, until 1966, Nigeria had a persistent trade deficit. The parallel market grew from there.
It is common knowledge to every student of economics and history that trade influences the demand for currency, which in turn helps drive currency prices.
The parallel market is important to many in the sense that it is a truer tale of reality than what is said by a country’s primary financial regulatory agency, the central bank.
This article discusses what is done in the parallel market, what creates parallel or black markets, and how it concerns the exchange rate.
Supply scarcity made the parallel market what it is right now. The black market as it is called is the place where many go to make their financial needs met.
It is the place where the well never completely dries. The naira’s unending struggle with the dollar is a story that children born yesterday are familiar with.
The struggle between the naira and the dollar has been used in every election since 1957.
This tussle between the naira and the dollar has given some people more leverage than they ever dreamt was possible.
It has minted sets of individuals that went from lack of being worth millions in dollars.
The Nigerian financial system
The goal of a sound financial system is to enhance cooperation between all participating members.
The financial system is an intermediary that stands between all units that operate from all sectors and ensures that they conduct themselves in a way that benefits all.
A working financial system affects the entire economy and makes the progress of most sectors a possibility.
The Nigerian financial system is divided into two – the formal subsector and the informal sector.
The formal sector comprises the regulatory bodies, the money market, the capital market, the foreign exchange markets;
brokerage companies, insurance companies, deposit money banks, development banks, and other financial institutions.
The regulatory bodies are comprised of the Federal Ministry of Finance, the Central Bank, the Securities and Exchange Commission, the Nigerian Stock Exchange;
The National Insurance Commission of Nigeria, the Nigerian Deposit Insurance Corporation, and the Federal Mortgage Bank of Nigeria. These regulate the activities of the rest.
The informal sector is made up of self-help groups, financial cooperatives, and credit associations.
It is when the activities of the regulators and the others can no longer meet demands that they visit the parallel markets to get some things done.
The parallel market
This market is a financial activity that takes place outside government-sanctioned channels.
This parallel market is one that is full of activities that will normally not be approved by the government.
While many believe that activities within the parallel market in Nigeria are controlled by the government, that is not the whole truth.
Private agents who have the reach also trade and benefit from the imbalances and unpredictable ups and downs within the system.
Like in the case of Colombia and Guyana, the development of the black market for currencies was a result of drug-related activities.
This is not to say that governments are completely free though, sometimes parallel markets are created by the government for good reasons.
Parallel markets are a problem for many countries, it is common but not restricted to developing countries.
What gives rise to a parallel market?
Many things could give rise to parallel markets, chief of which are foreign exchange supply issues, payment issues, and government price control.
In some cases, governments respond to a balance of payments crisis by creating a legal parallel (or dual) foreign exchange market for financial transactions.
The objective is to avoid the short-term effects of a depreciation of the exchange rate on domestic prices while maintaining some degree of control over capital outflows and international reserves.
In some other cases, extensive controls on foreign exchange restrict access to official markets and lead to the emergence of a parallel market.
A parallel market is created when regulatory bodies such as the central bank peg the exchange rate at a particular amount and permit only a small group of authorized intermediaries to engage in transactions involving foreign exchange.
The sale of these foreign currencies is now only restricted for reasons that are deemed essential such as payments of balance and economic developments.
To satisfy this excess demand for these foreign currencies, some part of the restricted currency is carted off and sold for a price higher than the standard rate.
Parallel market premium is now dependent on factors like the penalty structure and how devoted the authorities are to catching and prosecuting offenders.
So, what is done in the Nigeria parallel market?
Investopedia puts this properly when it describes the black market as “venues where highly controlled substances or products such as drugs and firearms are illegally traded.
Black markets can take a toll on an economy since they are shadow markets where economic activity is not recorded, and taxes are not paid.
In the financial context, the biggest black market exists for currencies in nations with strict currency controls.”
The Nigerian parallel market is a place where people turn to when they run out of options and need financial help.
The kind of financial help that they can only get in unrecorded places and at prices that may not be fair but is better than nothing at all.
The parallel market in Nigeria is a product of measures taken to evade control which has led to an expansion of the illegal market for goods and currencies.
What is the parallel market exchange rate?
The parallel market exchange rate is one that is determined by market forces and not pegging.
In Nigeria, low liquidity in the much cheaper official window means that those who need dollars patronize the parallel market, making the greenback more expensive.
The parallel market exchange rate has varied from time to time and is largely dependent on prevailing conditions at the time.
What is peculiar about the Nigerian parallel market?
While most people may shun a black market because they consider it sleazy, there may be rare occasions when they have no choice but to turn to this necessary evil.
This is one way people have made 10 times the money they have put in.
The Nigerian parallel market is one that is always active because of Nigeria’s quite unstable economy.
Right from 1999, Nigeria has found itself going from one crisis to the other.
Is the parallel market an indicator of anything?
A government official is quoted as saying that the “parallel market as far as we know it and the data that we have is a shallow market in Nigeria with no more than 5 percent of market share.”
This is an indication that the market share of the parallel market is disturbingly higher than many would like to admit.
That the parallel market is thriving is an indication of the fact that the central bank is unable or unwilling to meet all the demand for foreign exchange at the official exchange rate.
The percentage of the financial market that the parallel market occupies in Nigeria is large enough.
Much so that the CBN has not hidden its intention to close the wide gap between the official exchange rate and parallel market rate.
It is a sign that things are not the way they should be, and that there is work to be done.
Can the Nigerian parallel market be exploited?
Very much so. Since many things over the last couple of years have received forex bans, those who need FX to carry out transactions have to seek alternatives, and this alternative is the parallel market.
To give a clue about the nature of restrictions, those who have approvals for FX to carry out their transactions also find it difficult getting forex from banks and the BDC operators because of limits placed by the authorized dealers.
This makes the parallel market to continue to thrive and even further raises the value of the dollar higher than the naira due to demand.
The market is such that those who need money for illegal activities go to the parallel market for funding.
Nigeria’s security and economic problems are further exacerbated by this access to foreign exchange in the parallel market.
It is much so that Nigeria’s central bank governor Godwin Emefiele is quoted as saying the parallel market is “a tainted market in Nigeria.
It is where people who desire to deal in illegal foreign exchange transactions including sourcing of FX cash for purposes of offering bribes, corruption, that is where they deal.”
Whatever be the factors that lead to the creation of parallel markets, one thing is certain.
The size of a parallel market will depend on the range of transactions subject to exchange controls and the degree to which restrictions are enforced.
As is the case with all things subject to the laws of economics which are demand and supply, one determines how the other fares.
In countries with sufficient reserves where the demand for foreign exchange is met, for the most part, the parallel market will remain a minor player.
Meanwhile, in countries where there are insufficient reserves and the balance of payments deficits are prolonged and recurring, the parallel currency markets will be well developed and organized.