No other economy has a ‘brighter opportunity’ for arbitrageurs like ours. And in no other market has arbitrage taken a firmer root than in foreign exchange. The differential between the investors’ and exporters’ (I&E) and the parallel market windows is above N85.
That is a sufficient incentive to play on the tricks with the rules of the market. It is, for this reason, the international money transfer operators (IMTOs) are not willing to ditch the old trick of paying beneficiaries on remittance in local currency notwithstanding the new rule that mandates them and their agents to pay in foreign currencies. And it is the basic incentive fuelling the recalcitrant round-tripping monster.
But the most dreaded devil is when capital inflows the country loses this. The parallel market rate, which is about N480/$ is considered the truest reflection of the worth of the naira. But except you route through the backdoor, you can only get an exchange of N395/$ (plus or minus) when you bring in capital to invest in the market. The foreigners, who feel cheated by this rule and the high inflation rate, rather steer clear of the market.
Arbitrage exists as a result of market inefficiencies. Where all markets are perfectly efficient, arbitrage becomes a mere academic discourse. The differential in Nigeria’s forex rates, which is almost as old as the market, is the cause and effect of the management of the local currency. The Central Bank of Nigeria (CBN), perhaps, also realised this damage last year when it muted the rate coverage plan. But as usual, political willpower has persistently had the upper hand.
Today, there is a black-market currency dealer from buying or selling buck. But don’t blame any of those guys – they are merely filling a vacuum. This trade is not entirely new to Nigerians but there is an aspect of it only the ‘dealers’ and their customers, as well as a few observers, know about. Big organisations run to them when they have an urgent need. Also, they regularly come to the aid of manufacturers whose requests when they need to pay for inputs and equipment are rarely met through the official window.
But all along, the CBN plays the ostrich when the parallel market issues are on the table. For instance, it often warns the market against patronising the parallel market when it does not have enough dollars in its vault to give to meet all genuine demands. Weekly, it allocates $10,000 to a bureau de change (BDC) operator when it gets a $100,000 request from perhaps an individual that same week.
As admitted by the International Monetary Fund (IMF), “Parallel markets make available commodities (food, intermediate inputs, durable goods, etc.) which would not have otherwise been forthcoming, due to the existence of rationing in the official market for foreign exchange.” Needless to say that the alternative market reduces social and political tensions while employing thousands of Nigerians.
The best forex market is one with harmonised rates. But the second is not one where the larger majority of businesses that need forex are starved to death because there is no alternative to inaccessible official windows that cannot meet the needs. The second scenario is the likely result of CBN’s highhandedness towards the parallel market.
CBN’s monopoly of the supply side of the forex market has never been more challenged than now. Oil prices still face headwinds while capital importation has plummeted to a historical low, putting enormous pressure on the external reserve – the apex bank’s arsenal. The supply gap, making the parallel market a necessary evil nobody can dismiss. The segment has risen to the occasion of providing the much-needed liquidity at crucial moments.
It is thus surprising that the CBN has continued to discredit the activities of this segment. It has continued to take measures in stifling activities of players thereby attempting to project the market as illegal, as against recognizing the role of the market in creating the much-needed supply buffer.
For instance, in recent months the CBN has mandated banks to place post-no-debit status on the accounts of entities that participate in the parallel market. Such directives are rather sudden, unsupported with any evidence of wrongdoing and without any prior notices.
By taking such measures, the CBN is not only showing a lack of concern for how its actions affect third parties with whom those companies have dealing with but also put the bank in the position of the accuser and the judge.
In these challenging times, when individuals and companies are grappling with the COVID-19-induced economic crisis, the CBN’s measures have had a devastating impact on end-users, business owners, employees, families and dependents of the affected entities.
In some other climes, the parallel market exists side-by-side with the official market as an alternative source. In Nigeria, the role of the parallel market has never been to usurp the official market but to complement it in providing liquidity when needed, thus reducing pressure on businesses and liquidity, which is king. It has created an alternative for people in dire need of foreign exchange.
Rather than attack or chase players in the non-cash market, the CBN should see them as partners in nation-building. The system will wield out the parallel market when it becomes redundant. But to artificially get rid of them is an invitation to economic starvation the country may live to regret.
Omoarelogie wrote from Lagos.
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