Black market forex sale thrives without official channels
By Jeph Ajobaju, Chief Copy Editor
Black market sale of foreign exchange (forex or FX) accounts for less than 10 per cent of forex transactions but impacts the economy in significant ways that deplete the treasury.
Such transactions are not fully documented with the Central Bank of Nigeria (CBN), unlike those done through banks that must keep records and account to the regulator.
The also fragments forex sales. The more fragmented the market the less foreign investors are willing to participate because it increases risk.
Foreign Portfolio Investment (FPI) inflow reduced 34 per cent to $3.39 billion in 2021 against $5.16 billion in 2020, the least FPI in the past five years, according to Central Bank of Nigeria (CBN) data.
FPI has seen two consecutive years of decline, slashing 68.5 per cent from $16.38 billion in 2019 to $5.16 billion in 2020, from where it reduced 34 per cent to $3.39 billion in 2021.
Low participation of offshore investors weakens the liquidity of foreign-denominated currencies in the local currency market. Those who invest cannot repatriate their funds.
Local businesses suffer from the shortage of dollars and the bureaucracy of banks processing their offshore transactions.
When the CBN stopped foreign exchange forex sales through bureaux de change (BDCs) last year, supply scarcity exacerbated naira’s weakness.
However, market participants argue the demand pressure reflects a weak supply in other segments of the forex market.
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Dangers in the black market
A black market is where foreign currencies are exchanged illegally for naira, through brokers or “abokis” as they are called in Nigeria, per Nairametrics reporting.
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 wants to sell dollars for naira will be paid higher than the official rate. The premium is essentially a “laundering charge” paid by people who buy dollars without any right to do so.
There are some legitimate reasons why Nigerians access the parallel market. But the black market is also a have for illicit financial flows, currency rackets, arbitrage, and round-tripping.
Some black market players deliberately create forex shortages so people can buy from them at a higher rate. Tax free black markets cost the government revenue.
The underground market exposes patrons to a number of drawbacks, including fraud, violence, and theft.
Outlook
Parallel market exchange rate could remain high for some time, even if the likely resumption of forex sales to BDCs helps to moderate naira’s continuous decline in the parallel market and closes the differential, Nairametrics explains.
The wider the gap between the parallel market rate and the official window rate, the more transactions will flow to the parallel market.
The more fragmented a market is, the less foreign investors are inclined to participate, because it increases market risk.
Analysts say the parallel market is small, accounting for less than 10 per cent of forex transactions, but has a significant signalling effect.
If the official rate differs significantly from the parallel market rate, people will continue to believe naira will be devalued eventually.
As well as improving convergence in rates, the CBN may need to intervene in the forex market again. But that depletes foreign reserves.
