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Who the Parallel Forex Market ‘Epp’?, By Olamide Eyinla

Naira-notes

…to manage the parallel market into extinction, I am of the opinion that the first decision is to reduce the demand in that market, and consequently reduce the supply. To reduce demand, the CBN needs to unban all the 41 items on its ban list for access to forex and then the Customs Service can ban the importation of all the 41 items. For some that may not be outrightly banned, increases in their excise duties should be introduced to reduce their viability for import.

The main issue in Nigeria presently is the value of the naira. Sometime in June 2016, the naira was floated to reflect its true value as the government ran out of resources to maintain her defence of the artificial value of the naira. Ceteris paribus, this decision would lead to the eventual closure of the parallel market. Sadly, this aspiration remains an aspiration and does not look like it would be actualised any time soon.

A layman’s definition of the parallel market would shed some more light on why it remains a vibrant option in Nigeria despite the seemingly deliberate attempt to eradicate its existence. According to Google, a parallel market is an unofficial market in goods or currencies, especially in a country with a ‘controlled’ economy. Now, this is where the problem lies. As stated earlier, the foreign exchange market was deregulated in June. What this ordinarily should lead to is a systematic closure of the parallel market, however, the market remains as viable as ever.

Now, why is the parallel market in Nigeria reluctant to die? I am of the opinion that the market condition calls for it. Like every market, there must be a buyer and a seller which are consequences of demand and supply. The truth is that there is a state policy to create demand for foreign currencies through the parallel market. When there was financial pressure on the dollar supply before the deregulation of the naira, the monetary policy custodian in Nigeria – the Central Bank (CBN) placed a ban on the provision of the scarce dollars for the importation of 41 items that can potentially be produced in Nigeria. These items range from rice, margarine, palm kernel/palm oil/vegetable oil, textiles, clothes, plastic and rubber products, polypropylene granules, cellophane wrappers, etc.

The logic behind these bans are commendable and necessary in order to develop the products locally, however the kind of ban effected was the incorrect one. The CBN, noting the importance of some of these products, decided not to allow their importers access to dollars through the official sources. This situation led to the demand for forex that needs to be met. The value of the demand was premium and hence, capitalists sought avenues to meet this demand by placing more value on forex than obtains through the official channel. This led to the creation of the much vilified parallel market. To further exacerbate the case, these demands are in billions of dollars. The attractiveness of the parallel market to its operators and sellers allows for the availability of more supply of forex in this market, thereby making it a market of choice to buyers.

The market is often on a cash and carry basis, and hence attractive to the buyers and sellers alike. With the current scarcity of forex in the official market, the parallel market becomes more attractive, leading to the increase in the price of the dollar and an over 20 percent price differential between the official and parallel market rates. The effect of this behaviour cannot be over-emphasised as the current inflationary trend in Nigeria is a cost-push one, which is primarily as a consequence of the parallel market price of the dollar, as manufacturers also patronise this market to meet with their dollar requirements as the speed of access is guaranteed.

Pertaining to the reduction of supply, ordinarily a decline in demand leads to a reduction in the price of forex. This reduces an incentive to sell forex in the parallel market. Other ways are for the government to increase dollar receipt through securing the Niger Delta, since that would reduce demand for petrol as power generation improves, refinery productivity improves, and income earnable from crude oil and gas improves.

A thorough look at the current foreign exchange market reveals a controlled currency market. We know that in a free market, the price of goods or a currency will be determined at the equilibrium of demand and supply, but certainly, the current price of forex is not at equilibrium hence its scarcity. Sadly, the parallel market price is closer to the equilibrium, hence there is an improved and reliable supply there in comparison to the official market. How else can Nigeria react to a massive drop of activities in the official foreign exchange market? Barely two years ago, the foreign exchange market traded an average of 300 million dollars per day, but now trades 1.5 million dollars a day. This shows the level of decline in the official market, meaning that the parallel market has increased in size significantly.

So to the topical question: Who benefits the most from the parallel market? I am of the opinion that only the market operators do. The buyers and the sellers in this market do not benefit as much as they might believe because they pay way too much premium on the forex they procure. Any gain made by either the buyers or sellers from the market is short term as the economy cannot develop on the high level of the vibrancy of the parallel market. When the choice market for forex buyers or sellers is the parallel market, there is no way the economy can develop or get out from whatever financial quagmire it is in.

So, to manage the parallel market into extinction, I am of the opinion that the first decision is to reduce the demand in that market, and consequently reduce the supply. To reduce demand, the CBN needs to unban all the 41 items on its ban list for access to forex and then the Customs Service can ban the importation of all the 41 items. For some that may not be outrightly banned, increases in their excise duties should be introduced to reduce their viability for import. A waiver (reduction and not total) can be issued to businesses that can prove that they (or their sister companies) have investments locally that can produce these items in the country.

Pertaining to the reduction of supply, ordinarily a decline in demand leads to a reduction in the price of forex. This reduces an incentive to sell forex in the parallel market. Other ways are for the government to increase dollar receipt through securing the Niger Delta, since that would reduce demand for petrol as power generation improves, refinery productivity improves, and income earnable from crude oil and gas improves. The Nigeria Exports Promotion Council should have incentives for exporters who repatriate their fund through official channels.

Olamide Eyinla, a Human Resources practitioner, wrote from Lagos.

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