WHEN $ BECAME CHEAPER IN THE BLACK MARKET!
By: Sir Henry Olujimi Boyo (Les Leba) republished in April 2015
INTRO:
Last week, this column republished “Will any of the current political parties rescue the economy?” The article discussed the lack of economic knowledge of prospective leaders/current leaders and how this proves detrimental to Nigeria’s progress. All republications can be found in the archives using the below link.
(See www.betternaijanow.com for this series and more articles by the Late Sir Henry Boyo)
Today’s republication points out that due to the conditions of demand and supply alone, surplus money circulation in the money market should not bring about high lending rates making it difficult for local business owners to thrive. The article demonstrates the various factors that can impact the value of the Naira. It references a period when monetary tools where manipulated causing theNaira to appreciate overnight, highlighting the concern that Nigeria’s road to economic recovery is hindered solely due to mismanagement.
As you read through the below article taking note of previous events and rates, keep in mind its first republication (2015), a clear indication that things remain stagnant even as we face the year 2023.
Nigerians have become familiar with the irregular cycles of stable supply and intermittent scarcity in the market for various products, ranging from essential commodities, such as sugar, bread and salt to the equally important market for petrol and kerosene. Expectedly, prices of these items spiral whenever there is a supply deficit, while prices will collapse when supply levels are once again restored. Indeed, in a free market, prices of goods and services faithfully follow this pattern; curiously, however, the money market in Nigeria (as well as in several other African countries) is one of the few exceptions, where a commodity (in this case money) which is alleged to be constantly in surplus, becomes increasingly expensive and costs well over 20% to borrow!
For some unknown reason, the management of these Economies remain in denial of the causative link between the ever-sliding rates of their domestic currencies against the dollar and the unceasing, unbridled, deliberate domestic creation of excessive cash surpluses by the respective monetary authorities. In the Nigerian experience, for example, the uninhibited increase and failure to successfully control money supply, made the attainment of a stronger Naira exchange rate impossible, even, when we “consolidated” best ever foreign reserves of about $60bn with extended imports payments cover.
Consequently, what has become an abiding feature in Nigeria, is the constant spectre of deliberately created domestic cash surpluses chasing rations of dollar supplies, which are controlled by the Central Bank.
Clearly, wherever products are rationed, an insidious black market which will recycle scarce supplies for resale at higher prices will evolve; ultimately the black-market price becomes a product of the extent of supply shortage and the number of ‘distributors’ in the chain before it reaches the final consumer. What is clear, nonetheless, is that a black market generally compromises supply sources and distorts market distribution to instigate higher prices and excessive profiteering in the sale of any scarce commodity.
Similarly, in the context of Nigeria’s foreign exchange market, the inability of our monetary authorities to successfully modulate the balance between Naira and dollar supply, in favor of the Naira, has led to an artificially induced dollar scarcity in a clearly vibrant and inexplicable government funded black market. Consequently, in consonance with the characteristic feature of higher prices whenever there is market scarcity, it would therefore be an aberration if the black-market price of the dollar ever falls below the official or interbank exchange rate.
Nonetheless, such an apparent price aberration, unexpectedly, transpired in the recent past in our own foreign exchange market! Indeed, barely a week before the Presidential polls in 2015, market watchers noted that the black-market dollar exchange rate had fallen from above N220=$1 to between N212 -N215=$1; furthermore, between the weekend of the presidential polls and the Easter Holidays, the Naira further strengthened on the black market to below N210, while the official rate remained steady at about N197 = $1.
The real drama, however, came in the last couple of days before the state elections, when the Naira exchange rate in the black market strengthened below the official rate to sell, reportedly, for as low as N195=$1! The unexpected appreciation of the Naira in the black market was interpreted in some quarters as an expression of public confidence that Gen Buhari will ‘make’ the Naira stronger when he assumes power.
The question, however, was whether or not such public sentiments are strong enough to make any black-market forex dealer offload their stock of dollars at prices below the cost of purchase; if not so, what then could have happened?
Well, a fall back to the solid ground of the law of supply and demand may provide us with a plausible answer. Thus, the Naira could only become stronger, if the monetary authorities significantly increased the supply of dollars, while keeping constant or actually also reducing Naira supply and demand. Well, there is no overt evidence that there was any significant unusual reduction in money supply, during the period in question, although the extended Easter Holidays may have, despite the availability of ATMs, reduced free access for huge movements of Naira for large transactions. So, if stronger Naira exchange rate in the black market was not the result of a significant difference in the Naira supply side of the equation, then we may turn to the dollar supply side for an answer. In other words, was there any apparent increase in dollar supply or did the hoarders of dollars decide to simply offload their holdings below cost price as part of their celebration of Muhammadu Buhari’s victory?
There is nothing to suggest that CBN spiked its dollar supply to Bureau de Change during this period; if anything, the CBN has continued to intermittently reduce the amount of forex allocations to BDCs because of supply challenges. Conversely, there were unconfirmed media reports of dollar bounties, which were deployed to attract votes throughout the federation by the political class in the last eight weeks and particularly in the two weeks between the Federal and State elections. Evidently, the compact value of the dollar made it the currency of choice for easy movement for the job that had to be covertly done to improve the chances of victory at the polls.
The actual value of dollars deployed for this purpose is not known, but it was certainly large enough to temporarily overwhelm subsisting Naira supplies with BDC operators to make the Naira relatively scarce against the dollar. It was consequently no big surprise therefore, that the heavy inflow of dollars into vibrant black-market centres in Lagos, Kano, Ibadan, Port Harcourt, Abuja etc. quickly strengthened the Naira exchange rate below the official N197=$1.
The ready availability of a significant Cache of dollars for election campaigns is probably an indication that CBN’s attempt to reduce the menace of bulk importation of dollars since 2013 must have been an abysmal failure.
Clearly, the sales of dollars below the official interbank rate is probably also reflective of the usual bargain prices accepted for prime quality stolen goods. Thus, if the CBN did not suffocate the black market with dollar supply, then the political class which, presumably temporarily did so, did not care much about receiving market value for the dollars shared, probably because, in the manner of stolen property, they did not have to put in any shift to acquire the dollars they liberally spread amongst their supporters.
Expectedly, nonetheless, the dollar surplus was unsustainable and the Naira now once again exchanges in the black market for over N220=$1.
SAVE THE NAIRA, SAVE NIGERIA!!
