The implications of high cost of dollars in Nigeria’s black market

The scarcity of the US dollar in recent times in Nigeria has pilled pressure on the local currency, naira.

Analysts have attributed diminishing foreign investment, rising cases of oil thefts, as responsible for the scarcity of foreign-denominated currencies in the country’s currency market.

The difficulty in the repatriation of funds by foreign investors have further worsened the situation.

Stakeholders in Nigeria’s currency market argue that the demand pressure is a reflection of a weak supply in other segments of the FX market, however some others are of the opinion that the apex bank’s suspension of bureaux de change’s participation in its foreign exchange sales in 2021 is largely responsible.

Implications

At the black market or parallel market, brokers illegally exchange foreign currencies for naira in Nigeria at rates that are usually above the official exchange rates of the country.

This difference between the black market and the official exchange rate is known as the parallel market premium – which is basically a “laundering charge” paid by individuals who are buying dollars but may not have any right to do so.

The market aids illicit financial flows, currency rackets, arbitrage and indiscriminate round-tripping.

Some black market traders craftily create artificial shortage of foreign exchange so as to sell same at a higher rate to willing buyers.

Another set back is the loss of revenue to the government as the parallel market transactions are not taxed by the government.

The market has a significant signalling effect on the economy which often leads to speculations that the local currency will be devalued over increasing parallel market premium.

More transactions are likely to move in the direction of the parallel market as long as the difference between the official and black market rates remains huge. This will impact negatively on foreign investment as the more disjointed a market is, the less attractive it is to foreign investors as it increases market risk.

Local businesses will continue to experience higher cost of transactions as most source their foreign exchange needs from the black market as a result of the bureaucratic processes of many Nigerian banks in processing their offshore transactions.