The high cost of buying dollars on the Nigerian black market
In Africa’s largest economy, chronic shortages of dollars have put pressure on the naira as rising cases of oil theft, coupled with low participation of foreign investors, weaken the liquidity of foreign-denominated currencies. in the Nigerian currency market.
The pursuit of dollars is also compounded by the fact that foreign investors cannot repatriate their funds.
Local businesses continue to suffer from dollar shortages and the bureaucratic processes of many Nigerian banks in handling their offshore transactions.
As the CBN halted currency sales through money changers last year, the scarcity of supply exacerbated Naira weakness. However, market participants say the demand pressure is a reflection of weak supply in other segments of the forex market.
Generally, a black market is where foreign currency is exchanged illegally for naira, through brokers or ‘abokis’ as they are known in Nigeria.
The parallel market premium is the difference between the parallel market rate and the official market rate paid by a black market customer.
A market participant who wishes to sell dollars against naira will pay a premium over the official rate. The premium is essentially a “laundering charge” paid by people who buy dollars but have no right to do so.
There are legitimate reasons for Nigerians to access the black market, but it is crucial to note that the black market is also the site of illicit financial flows, currency rackets, arbitrage and mindless back and forth.
Some black market players deliberately create currency shortages so that people need to buy from them at a higher rate. Tax-exempt black markets result in lost revenue for the government.
The underground market exposes several Nigerian citizens to a number of disadvantages including the risk of fraud, violence and arbitrary theft.
- Thus, the parallel market exchange rate could remain high for some time, although the likely recovery in foreign exchange sales at exchange offices helps to moderate the continued decline of the Naira in the parallel market and gradually close the rate differential. change.
- The greater the difference between the parallel market rate and the official window rate, the more transactions will flow to the parallel market. The more a market is fragmented, the less foreign investors are inclined to participate in it, as this increases market risk.
- Analysts say the parallel market is small, probably accounting for less than 10% of forex transactions, but has a significant signaling effect. In case the official rate differs significantly from the parallel market rate, people will continue to believe that the Naira will eventually be devalued.
- In addition to improving rate convergence, the central bank may need to actively intervene again in the foreign exchange market.