Nigeria is a black market haven. Fuel, dollars and even visas can be obtained from that unaccounted-for market of goods and services. The results are untoward for our already wobbly economy. It will take a massive rework to get the economy back on track.
Wikipedia describes a black market as underground economy, or shadow economy, (which) is a clandestine market or transaction that has some aspect of illegality or is characterised by some form of noncompliant behaviour with an institutional set of rules. Examples of such a market includes the drug trade, prostitution (where prohibited), illegal currency transactions and human trafficking.
It may interest you to understand that many who frown at the mention of black market unwittingly engage in black market activities. These activities are subtle and may not appear so. For example, the acquisition of a house help without going through a registered agency that pays taxes to government and are not subject to any of the labour laws of the country. But topping the black market list in Nigeria is petroleum products, and dealings in naira and or forex. It is this ‘dealing in the naira that is the motivation for this piece. By its nature, the market is undocumented and so transactions have no trail. Transactions are inherently opaque and can make the economy fall short in transparency rankings. There is little doubt about this given Nigeria’s bottom rung position in Transparency (TI) rankings.
The naira black market illustrates a danger in black market transactions; double counting. The Central Bank, like other business entities or companies, record their transactions in accounting ledgers in terms of assets and liabilities; cash issued into the economy represents liabilities while treasury bills sold constitutes its assets. Take this to mean that every note issued is recorded and increases the liability of the CBN. TBs are sold to balance the equation. So black market naira presents understatement of the amount of currency in circulation. It means the Central Bank has little control of aspects of monetary policy couched on fractional banking and interest rates.
It makes nonsense of the money multiplier and the Monetary Policy Rate (MPR), instruments for managing money in circulation, volume of credit and inflation. This could mean that the quarterly meeting of the Monetary Policy Committee (MPC) of the Central Bank is a mere hang out of peers, a charade with little or no impact on the economy.
If the money in circulation indeed far exceeds that which is recorded on the liability side of the books of the CBN, shouldn’t that mean that we have more inflation than presented by the authorities? Inflation is currently put at 11.14 percent, suspiciously down from 11.3 percent.
Black market activities cannot be towards calculating the gross domestic product (GDP), a well established economic growth indicator. GDP is the total value of everything produced by all the people and companies in the country. Suffice this to mean that Nigeria’s $490 billion GDP is incorrect by a long shot. But there are other setbacks inflicted on economies with large black markets.
The opaqueness of a black economy lends itself to tax evasion and avoidance by economic units. This means that the level of taxation is disproportionate to what could be the ‘true GDP’ of the country. This worsens even the belief that Nigeria is one of the most under taxed countries in the world. Nigeria’s tax to GDP ratio is put at 6 per cent compared to Ghana’s 15.9 per cent and South Africa’s 27 per cent. This immediately challenges government’s fiscal measures to control the economy. The tax multiplier becomes a sterile instrument in the hands of government. Government fiscal policy immediately becomes suspect.
Given the scary untoward results of the shadow economy, shouldn’t government move to curb it even if it cannot be totally eliminated? Government must move quickly to formalise the economy. It can achieve that by accelerating the cashless initiative. When a good percentage of the transactions are card or electronic based, monetary authorities are able to track where the money goes and effectively detect where suspicious activities are being carried out.
Mainstreaming the so called informal sector would have the effect of properly accounting for GDP. After this is achieved, government can introduce a tolerable tax regime. Because according to Investopedia, it is the presence of taxes and laws that forces transactions underground. But for drugs like Marijuana, which has a very huge black market, government can relax the laws but charge heavy taxes in order to regulate the market. These actions are likely to help keep black market in check.
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