Nairametrics| As at Friday, the 17th of March 2017, the exchange rate at the black market was about N455/$1 compared to the official CBN rate of N306/$1. This represents a disparity of N149 0r 33% between the official and parallel market rate. As bad as this looks, it is far better than the 41% or N214 disparity we experienced prior to the new exchange rate policy introduced by the CBN in February 2017. However, most economist and analysts all over the country want something better.
They are clamouring for a free float of the naira (by the way, we are also fans of a free float of the naira) because they believe that it will result in three success points. Firstly, foreign investors will be assured that they can repatriate their money whenever they want and without relying on the CBN.
Secondly, A free float could also solve the problem of price discovery once and for all and maybe reduce the disparity between the official and parallel market rate to under 5%. And finally, just maybe, a free float could also signal the end of the parallel market.
These three conclusions could have been full proof if it were another economy. Unfortunately, Nigeria is known to buck the trend for the simple reason that applying the same method that seem to work elsewhere produces a different result here. While, a free float of the naira could result in a return of foreign investors, it is unlikely to lead to an elimination of the parallel market. It is also unlikely that we would achieve a rate disparity that is less than 10%. Let’s explain why.
What happens to those without documentation
The latest Forex policy allowing the banks to sell PTA to Nigerians requires applicants to provide necessary documentation. A float of a country’s currency will also require that buyers meet the same criteria. Forex will not be sold to just anyone who walks into a bank as you will still need to provide the documentation required before forex can be sold to you. For those who do not meet this criterion, the black market is a logical option. A lot of FX buyers in Nigeria fall into this category.
What about bribery and corruption, Money Laundering etc. Who serves this market?
The black market still helps facilitate corruption activities in Nigeria as well as illicit transfer of funds such as money laundering. The official market when floated will not serve this group of unscrupulous people, leaving them to rely solely on the black market. You and I know the government can’t stop this activity at least in the near time. Just a few weeks back the EFCC caught a former government official with millions of dollars stashed in his house. With corruption, still stubbornly prevalent, the black market will remain sustained by the ensuing demand and supply from this segment of the economy.
Ineligible demand is still a big elephant in the room
The 41 banned items remain on the CBN list and could remain there even if the CBN decides to float the naira. Also, undocumented importers who do not want to go through official channels will still have to rely on the black market to fund their FX needs. This is a big elephant in the room and even rumours that the CBN might lift the ban might not do much to serve this demand. Nigeria remains a high import destination with demand growing either for supply of raw materials or finished products. As the world get more protectionist, I suspect some FX demands will remain ineligible for some time to come, giving buyers no choice but to purchase from the black market.
Currency speculators/collectors
There will still be holdouts against any forex policy the CBN puts out. Those who will bet against the naira will continue to stash dollars from the black market buying for those who cannot use up their FX allocations at a rate higher than the official rate in the hope that they can sell at the black market for a higher rate. These guys will keep the black market sustained. They also include the guys buying and selling on the streets of major cities around the country. Currently, CBN data reveals about $20 billion is locked up in the vault of banks as domiciliary account deposits. You’d have to look at that account to get an idea of just how much remains outside of the forex market. While most Nigerians who maintain these accounts do so for savings or as an account where their earnings are deposited, some keep them for speculative purposes.
Nigeria’s road to forex freedom is a long and arduous journey and we believe that it begins with a float of the Naira. However, any thought that it will eliminate the black market or close the rate disparity is folly. I hope that I am prove n wrong.
Floating will eliminate “black” or “parallel” market. Infact parallel market is the real market. And a lot of people who buy their fx from the official market turn and sell to the parallel market. Free floating is the right thing to do. We are just deceiving ourselves into thinking that we can actually artificially control the rate of naira when we do not have enough hard currency to sustain our import based economy. Not going to happen!
i totally disagree, we dont have to float the naira, you are clamoring for foreign investors, as if that will solve our problems, y not clamor for domestic investors? left to me if we want to improve our economy it doesnt boil down to forex freedom, inshort we dont need forex freedom.
who says we need foreign investors to improve our economy, left to me they will only make it worse, who says we need forex freedom, left to me we dont. let us work with ourselves, with domestic investors, we have all we need so stop clamoring for forex freedom when you know nothing about it.