The multiple exchange rates in the Nigerian FOREX market is one factor that has created a runaway exchange rates on the black market.
Businesses who get dollars at a concessionary rate of N315 from the CBN will readily move to the black market.
The fellow might sell it for N497 and might be tempted to leave real production and become a currency dealer.
Foreign investors are also aware that after investing at an official rate of N315/$1 will have to pay more to repatriate his profit.
This currency dilemma has stalled production and impoverished Nigerians.
Nigeria’s minister of finance, Kemi Adeosun, has said the black market deals would soon collapse.
Explaining to National Assembly members, Adeosun said this would happen because the market has no fundamentals.
Recall that the government tried to force black market operators to sell the dollar at N400 using the DSS but failed.
Now, the minister claims her ‘economics’ could achieve what her government couldn’t achieve with brute force.
To start with, the fundamentals driving the black market are clear.
And they are nothing but the supply-demand imbalances in forex –which is as a result of the fall in oil price and bad economic policies.
The scarcity of forex create black markets, and forex is priced at a premium in this market.
It is mindboggling that the government hasn’t realized its mistake.
The imposition of currency controls, without adequate fiscal measures, gave the black market all the oxygen it needed to survive.
When citizens cannot obtain forex at official exchange rates to meet some of their ‘basic’ demands, a black market develops.
Inflation is another culprit that has eroded Nigerian’s confidence in the naira.
And when citizens lose confidence, they tend to hedge the value of their cash holding.
This increases the demand on forex and fuels black market.
Economic fundamentals are also responsible for the growth of the black market.
Weak economic fundamentals such as high-interest rates and poor infrastructure make production difficult.
When goods cannot be produced locally, the only option would be to import them, even if there are ‘bans’ on them.
And because these imports can only be done with forex obtained from unofficial sources, the black market is sustained.
Having an unrealistic high exchange rate could also aid the black market.
The argument that only a small portion of our trade is done with forex from the black market is deceptive.
It’s either the government is playing ostrich with our economy or the handlers of our economy are bereft of ideas.
Why is black market booming in countries like Argentina, Iran, Egypt, Angola and Venezuela, and not in countries like Japan and the UK?
The fundamentals driving black markets are the same in weak economies.