I tried to buy a Sony PlayStation 5 for my kids. It was hell.
I am not a gamer, but the Playstation 5 was cool. So as a great dad, I went online to buy it on black Friday. My kids let me know in clear terms that they wanted it.
My first shock; Amazon said they did not have stock, but they didn’t stop there; they said, “We don’t know when we will get stock.”
I have read Amazon publish stock-outs but never that it could not guarantee an item in stock for sale; this was, of course, the store of the world. So I went everywhere, Jumia, Alibaba, Best Buy, slowly it dawned on me that something was amiss. This item was nowhere.
Last year, as Covid stopped all economic activity, the smart chip company also shut down. As the economy restarted, demand for smart chips from companies like TSM was quite significant, and it caused a severe backup of unfilled orders. Sony could not get enough smart chips for the Playstation 5; thus, the supply of the game console was severely restricted. This shortage in supply is what I was experiencing.
Playstation officially retails for $499; that’s the Manufacturer’s Recommended Selling Price (MRSP), but at that price, it is unavailable; see figure 1 from BestBuy, a large US retailer.
However, if you go online to the “black market” of individual resellers, the Playstation 5 is available but at a higher price. Figure 2 is a reseller offering the same Playstation at $1,149 on Amazon.
Sony, the Playstation 5 manufacturer, cannot supply enough consoles to meet demand; the manufacturers also advise a fixed recommended price. Whenever you have a fixed selling price and limited supply, a black market is created. To make money, I can simply “round trip,” I buy at the official price of $499 and sell on the black market at $1,100. Easy peasy! A business line has been created when buyers called “scalpers” build BOTs to buy high-demand goods like Playstations and retail them, making a considerable spread.
Sony does not like round-tripping because it distorts its market plans. If I can’t find a Playstation 5 for my kids, I can look at substitutes like the X Box, a Bike, or a drone, so Sony loses revenue long-term. However, the only option open to Sony is to increase supply. If the supply of Playstation 5 increases, the spread between the black market and the official market will reduce.
Let me repeat for emphasis, the only thing Sony can do to stop the round-trippers is increasing supply. I eventually bought my PlayStation from a kid who got it as a Christmas present. We transacted offline; I gave him cash, he gave me his original gift receipt. Sony can’t monitor this. I have registered that PlayStation as mine. I did not pay $499.
This week I watched in genuine shock as the Central Bank of Nigeria (CBN) Governor accused a private company that runs a price aggregation site of running an illegal operation, threatening the individual personally on air.
Some background to the story
In Nigeria, the official exchange rate is the NAFEX rate. NAFEX is the Nigerian Autonomous Foreign Exchange Rate. This rate is not determined by the CBN but by a company called the FMDQ OTC Securities Exchange. FMDQ determines the quoted rate by pooling ten banks that bid for forex and applying a “trimmed arithmetic mean.”
Nigeria operates a fixed exchange regime. The CBN retains the sole power to set exchange rates. The NAFEX rate indicates the available offers made by banks from their clients to the CBN, which the CBN can choose to meet. The black market is a floating market rate; prices in the floating market are “discovered” by the interaction of demand, supply, and speculation. Both markets are separate; however, the CBN attempts to influence the market-driven rate with words when its only power is the ability to supply forex.
The problem is this, 44 items are banned from the CBN FX window. Thus if you need to import rice, you can’t bid to receive CBN-funded USD. You have to go elsewhere. Where is “elsewhere?” It’s the parallel market.
Assuming I travelled to the US and did a summer job and earned $500. When I return to Nigeria, I have two options; I can sell my USD at the NAFEX rate to a bank or sell to a currency trader at the black market rate at a higher spread. You don’t have to be a genius to find out where I would prefer. The black market will pay higher for my $500 because their buyers will pay.
So just like the Playstation example, we have two markets; the NAFEX rate is cheaper but not available for me if I want to import rice. The Black market rate is more expensive but available. These two rates will never, again, never equalize until the CBN allows all players to access the same market and bid for the same dollar inflow.
If I have $500, and my price is determined by demand and supply, importers will push the exchange rate up, and the naira value will crash. This crash will attract more investors with $5,000 to inflow to the Nigerian market and make a larger spread. As supply increases, the spread reduces, and the Naira strengthens.
Like Playstation, the only way the Central Bank of Nigeria can make the Naira stronger is by “defending” the Naira by increasing the supply of USD to the NAFEX market. CBN cannot police what it does not know about; the current P2P market for USD is approaching $1 billion a day. Playstation could ban scalping, it can ask Amazon not to publish PlayStation for sale above $500, but it will be wasting its time. Many buyers will simply go offline and conclude their trades.
The CBN is doing today what the Government of Venezuela in 2016 tried to do with another website called DolarToday.com. Three Venezuelans owned and managed this website and provided a benchmark exchange rate that allowed Venezuelans to price their goods back home. The Venezuelan government sued the website, then sent hackers after it. Again a futile attempt. The only way to enforce the fixed Exchange rate is to increase supply. Where supply cannot be delivered, the currency is devalued just like George Soros forced the Bank of England to do.
In closing, let me say this; I understand why the CBN is fighting to keep the Naira strong. A strong local currency can reduce the inflation rate, but the CBN has limited tools for this. Imported rice is still in Nigeria, meaning Nigerians are still spending USD to import rice.
Nigerians are importing rice because the local supply of rice alone cannot meet demand. To make the Naira strong, Nigeria needs to export more, which means better infrastructure, and coordinated fiscal and monetary policies.
The CBN alone cannot boil the ocean, but it is trying pretty hard.