What is being done in Nigeria's parallel market | Complete Guide

What is being done in Nigeria's parallel market | Complete Guide

 

 What is being done in the Nigerian parallel market

There are very few people who can say that they have not heard of what is happening in the Nigerian shadow market. This black market has been.

 

From the time of Nigeria's first finance minister, Okotie Eboh, until 1966, Nigeria had a persistent trade deficit. The parallel market grew from there.

 

 

 

It is common knowledge to all students of economics and history that trade influences the demand for currencies, which in turn helps to drive up currency prices.

 

The parallel market is important to many in the sense that it is a truer account of reality than what is told by a country's main financial regulatory agency, the central bank.

 

 

 

This article discusses what happens in the parallel market, what creates parallel or black markets, and how it relates to the exchange rate.

 

Introduction

 

The scarcity of supply has made the parallel market what it is today. The black market, as it is known, is where many go to meet their financial needs.

 

This is where the well never completely dries up. The endless struggle of the naira against the dollar is a story that children born yesterday know well.

 

 

 

The struggle between the naira and the dollar has been used in every election since 1957.

 

 

 

This showdown between the naira and the dollar has given some people more influence than they ever imagined possible.

 

He hit groups of individuals that weren't worth millions of dollars.

 

The Nigerian financial system

 

The goal of a sound financial system is to enhance cooperation among all participating members.

 

The financial system is an intermediary that stands between all units that operate in all sectors and ensures that they conduct themselves in a way that benefits all.

 

 

 

A functioning financial system affects the whole economy and makes possible the progress of most sectors.

 

 

 

The Nigerian financial system is divided into two – the formal sub-sector and the informal sector.

 

The formal sector includes regulatory bodies, money market, capital market, foreign exchange markets;

 

brokerage firms, insurance companies, depository banks, development banks and other financial institutions.

 

The regulatory body They are made up of the Federal Ministry of Finance, the Central Bank, the Securities and Exchange Commission, the Nigerian Stock Exchange;

 

The National Insurance Commission of Nigeria, the Nigerian Deposit Insurance Corporation and the Federal Mortgage Bank of Nigeria. These regulate the activities of others.

 

The informal sector is made up of self-help groups, financial cooperatives and credit associations.

 

 

 

It is when the activities of regulators and others can no longer meet the demands that they visit the parallel markets to get things done. 

 

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The parallel market

 

This market is financial activity that takes place outside of government-sanctioned channels.

 

This parallel market is full of activities that will not normally be sanctioned by the government.

 

While many believe that activities within the parallel market in Nigeria are controlled by the government, this is not the whole truth.

 

Private agents who have reach also trade and profit from imbalances and unpredictable ups and downs in the system.

 

As in the case of Colombia and Guyana, the development of the currency black market is the result of drug-related activities.

 

This does not mean that governments are completely free however, sometimes parallel markets are created by the government for good reasons.

 

Parallel markets are a problem for many countries, it is common but not limited to developing countries.

 

What gives rise to a parallel market?

 

Many things could give rise to parallel markets, the main ones being foreign exchange supply problems, payment problems and government price controls.

 

In some cases, governments respond to a balance of payments crisis by creating a parallel (or dual) legal foreign exchange market for financial transactions.

 

The objective is to avoid the short-term effects of an exchange rate depreciation on domestic prices while maintaining some control over capital outflows and international reserves.

 

In some other cases, extensive exchange controls restrict access to official markets and lead to the emergence of a parallel market.

 

A parallel market is created when regulatory bodies such as the central bank fix the exchange rate at a particular amount and only allow a small group of authorized intermediaries to engage in transactions involving currencies.

 

The sale of these foreign currencies is now restricted only for reasons deemed essential such as balance payments and economic developments.

 

To satisfy this excess demand for these foreign currencies, some of the restricted currency is transported and sold at a price above the standard rate.

 

The parallel market premium now depends on factors such as the penalty structure and the authorities' dedication to catching and prosecuting violators.

 

So what are we doing in the Nigerian parallel market?

 

Investopedia correctly says this when it describes the black market as “places where highly controlled substances or products such as drugs and firearms are traded illegally.

 

Black markets can have detrimental consequences on an economy as they are parallel markets where economic activity is not recorded and taxes are not paid.

 

In the financial context, the largest black market exists for currencies in countries with strict exchange controls. »

 

The Nigerian shadow market is a place people turn to when they run out of options and need financial help.

 

The kind of financial help they can only get in unregistered places and at prices that may not be fair but are better than nothing at all.

 

T he parallel market in Nigeria is a product of measures taken to escape control which has led to an expansion of the illegal market in goods and currencies.

 

What is the parallel market exchange rate?

 

The parallel market exchange rate is one that is determined by market forces and not by the peg.

 

In Nigeria, the low liquidity of the much cheaper official counter means that those in need of dollars frequent the parallel market, making the greenback more expensive.

 

The parallel market exchange rate has fluctuated from time to time and is largely dependent on prevailing conditions.

 

What is special about the Nigerian parallel market?

 

While most people avoid a black market because they view it as shady, there may be rare occasions when they have no choice but to turn to this necessary evil.

 

It's a way people have made 10 times the money they put in.

 

The Nigerian parallel market is still active due to Nigeria's rather unstable economy.

 

As early as 1999, Nigeria found itself swinging from one crisis to another.

 

Is the parallel market an indicator of something?

 

A government official is quoted as saying that “the shadow market, as far as we know and the data we have, is a shallow market in Nigeria with no more than 5% market share”.

 

This is an indication that the market share of the parallel market is worryingly higher than many would like to admit.

 

The fact that the parallel market is thriving is an indication that the central bank is unable or unwilling to meet all demand for currency at the official exchange rate.

 

The percentage of the financial market occupied by the parallel market in Nigeria is large enough.

 

So much so that the CBN has made no secret of its intention to close the large gap between the official exchange rate and the parallel market rate.

 

It is a sign that things are not as they should be and that there is work to be done.

 

Can the Nigerian parallel market be exploited?

 

Absolutely. Since many things over the past two years have received forex bans, those who need FX to trade should look for alternatives, and that alternative is the parallel market.

 

To give an idea of ​​the nature of the restrictions, those who have approvals for FX to transact also find it difficult to obtain currencies from banks and BDC traders due to the limits imposed by authorized brokers.

 

This allows the parallel market to continue to thrive and further raises the value of the dollar above the naira due to demand.

 

The market is such that those who need money for illegal activities turn to the parallel market for financing.

 

Nigeria's security and economic problems are further exacerbated by this access to foreign currency on the parallel market.

 

This is how the governor of the central bank of Nigeria, Godwin Emefiele, is quoted as saying the parallel market is “a tainted market in Nigeria.

 

This is where people who want to deal with illegal FX transactions including FX cash supply for the purpose of offering bribes, bribery is where they deal.

 

Conclusion

 

Whatever factors lead to the creation of parallel markets, one thing is certain.

 

The size of a parallel market will depend on the range of transactions subject to exchange controls and the degree to which restrictions are enforced.

 

As is the case with everything subject to the economic laws of supply and demand, one determines the price of the other.

 

In countries with sufficient reserves where the demand for foreign currencies is satisfied, the parallel market will for the most part remain a minor player.

 

Meanwhile, in countries with insufficient reserves and protracted and recurring balance of payments deficits, parallel currency markets will be well developed and organized.