Opinion: Who parallel market epp?

by Olamide Eyinla

The main topic today in Nigeria is the value of the Naira. Sometime in June 2016, the Naira was floated to reflect its true value as the government ran out of resources to maintain her defence of the artificial value of the naira.

Ceteris paribus, this decision would lead to the eventual closure of the parallel market. Sadly, this aspiration remains an aspiration and does not look like it would be actualized any time soon.

A layman’s definition of what the parallel market would shed some more light on why the parallel market remains a vibrant option in Nigeria despite seemingly deliberate attempt to eradicate the existence. According to Google, a Parallel Market is an unofficial market in goods or currencies, especially in a country with ‘controlled’ economy.

Now, this is where the problem lies. As I stated earlier, the foreign exchange market was deregulated in June. What this ordinarily should lead to is a systematic closure of the market, however, the market remains as viable as ever.

Now, why is the parallel market in Nigeria reluctant to die? I am of the opinion that the market condition calls for it. Like every market, there must be a buyer and a seller which are consequences of Demand and Supply.

The truth is that there is a state policy to create demand for foreign currencies for the parallel market. When there was financial pressure on the dollar supply before the deregulation of the Naira, the monetary policy custodians in Nigeria – the Central Bank (CBN) placed a ban on the provision of the scarce dollars for the importation of 41 items that can potentially be produced in Nigeria.

These items range from Rice, Margarine, Palm Kernel/Palm Oil/Vegetable oil, textiles, clothes, Plastic and rubber products, polypropylene granules , cellophane wrappers, etc.

The logic behind these bans are commendable and required to develop them locally, however, the kind of ban that was made is the incorrect one. The CBN noting the importance of some of these products, rather than place an outright ban on these products, the CBN decided not to allow them access dollar for these products from the official sources.

This situation leads to the creation of demand for forex that needs to be met. The value of the demand will be premium and hence, capitalists will look out for avenue to meet this demand by placing a better buying price for forex than the official channel. This leads to the creation of the much vilified parallel market.

To further exacerbate the case, these demands are in billions of dollars. The attractiveness of the market to the parallel market operators and the sellers provides more supply of the forex in this market thereby making it a market of choice to buyers.

The market is often on a cash and carry basis, and hence attractive to the buyers and sellers alike. With the current scarcity of forex in the market, the market becomes more attractive; thereby increasing the price of the dollar in this market leading to over 20% price differential between the official rate and the parallel market price.

The effect of this behaviour cannot be over-emphasized as the current inflationary trend in Nigeria is a cost-push one which is primarily as a consequence of the parallel market price of the dollar as manufacturers also patronize this market to meet with their dollar requirement as speed for access is guaranteed.

A more thorough look at the current foreign exchange market still connotes a controlled currency market. We know that in a free market, the price of goods or currency will be determined at the equilibrium of demand and supply, but certainly, the current price of forex is not at equilibrium hence the scarcity.

Sadly, the parallel market price closer to equilibrium, hence, there is an improved supply there, thereby improving the reliable of the market as compared to the official market. How else can Nigeria react to a massive drop of activities in the official foreign exchange market?

Barely 2 years ago, the foreign exchange market traded an average of 300million dollars per day, but now trades 1.5million dollars per day. This shows the level of decline of the official market, meaning that the parallel market has increased in size significantly.

So to my topical question, who benefits the most from the parallel market? I am of the opinion that only the market operators benefit the most from this. The buyers and the sellers in this market do not benefit as they may believe because they pay way too much premium on the forex they procure.

Any gain made by either the buyers or sellers from the market is short term as the economy cannot develop on the high level of the vibrancy of the parallel market. When the choice market for Forex buyers or sellers is the parallel market, there is no way the economy can develop or get out from whatever financial quagmire she is.

So, to manage the parallel market to extinction, I am of the opinion that the first decision is to reduce the demand in that market, and consequently reduce the supply. To reduce demand, the CBN needs to ‘un-ban’ all the 41 items and then, the either the Custom Service ban the importation of all the 41 items.

For some that may not be banned outrightly, an increase in the excise duty should be introduced on them thereby reducing the viability of the import. A waiver (reduction and not total) can be issued to businesses that can prove that they (or sister companies) have investments locally to produce locally these items.

As to how to reduce Supply, ordinarily, a decline in the demand leads to a reduction in the price of the forex. This reduces an incentive to sell forex in the parallel market. Other ways is the government increasing dollar receipt through securing the Niger Delta as that would reduce demand for petrol as power generation improves, refinery productivity improves, and income earnable from crude Oil and Gas improves. The Nigeria Exports Promotion Council should have incentives to Exporters who repatriate their fund through official channels.


Op–ed pieces and contributions are the opinions of the writers only and do not represent the opinions of Y!/YNaija

Olamide Eyinla’s writes from Lagos Nigeria.

 

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