The Black (Parallel) Exchange Market Should Be Banned in
Africa
By
Mobolaji E. Aluko, Monday,
June 11, 2001 I have
never changed money in Nigeria's Black (Parallel) Market, and don't intend
to any time soon. Nevertheless, back
in August 2000, on my last trip
to Nigeria, I went with one of my many hosts to an open site in Ikeja,
Lagos State to watch him exchange a few hundreds of his own dollars. As we
drove up to this open foreign exchange market (this was at about 7 pm),
quite a number of at least 2 dozen
people were sitting around, and very
quickly a Mallam (whose turn it appeared was to attend to the next customer)
came to us to ask quite directly what denomination we had and how
much we were willing to exchange.
"500 US dollars" my host said. "115
Naira" the Mallam said the Dollar to Naira exchange rate (I don't quite
remember the exact amount that he said).
"120 Naira or I will leave,"
my host said. Without
much further haggling, the Mallam ran into this non-descript White house
just beyond the open yard, and came back with a bundle of Naira under
his Babanriga, and handed the bundle to my host, who counted quickly and
saw that it was N118. He handed all
the money back, and we made to leave,
but the Mallam quickly said, "Ah, oga" - and brought the rest of the
money out to give my host. At that
point, my host counted quickly further,
then surrendered his 500 dollars, and the quick deed was done. Just
like that. I
know that the Black Market is legal in Nigeria, but when we left the eerie
scene, I had to ask my host again:
"Is this legal?" He
said "Yes. Don't
you see all newspapers quote parallel market rates all the time?" "But
how do you know that his Naira are real, not fake, and how does he know
that all the dollars you gave to him are not fake?" There was no immediate
response, but I think that there was a matter of faith on both sides. Certainly, finger-testing $500 (5 $100
notes) could not have been a big
problem for the Mallam, but how my
host could so quickly be sure that
all the N60,000 bundle that was handed to him was kosher is still a mystery
to me. [I could relate another situation where all the dollars handed
to a close friend in a similar parallel market exchange were not kosher
- but I won't!] African
and Non-African Countries: Relative approaches to the Black Market I
relate this encounter in preparation to asking the question: should the Black
Market in Nigeria be so openly and legally done, and has it not considerably
hurt the value of our Naira over the years?
Should it not be BANNED
once and for all NOW and a concerted effort be employed to run ALL of
its operators out of town? Can a
country be so helpless about controls of
its own currency for even the government to appeal to its parastatals not
to engage in changing money in the Black market any longer, as president
Obasanjo was recently reported to have "appealed", or more accurately
"banned" such activity? Or when the governor of our Central Bank
makes optimistic statements about the appreciation of the Naira in the
parallel market? Why must our
president unilaterally ban government officials
from patronising a market if it is legal?
Otherwise, why is legislation
not enacted to BAN it right away, hence making government patronage
of such an activity a moot point? Why
do I ask these? For one, trading in the
Black Market in Europe, Asia and
most Latin American countries is completely ILLEGAL and has been so for
as long as we know. It must be for
good reason. If we look at the foreign
exchange rates of their currencies, they have largely not had large
mood swings, and if they had, certainly not due to the parallel market,
but due to occurrences such as wars, etc.. Table
1 below shows this for 30 non-African countries between 1980 and 1999,
none of which closes its eyes to ANY Black market within its borders. On the other hand, Table 2 also shows the
historical trend for both
official and parallel market exchange rates for 30 African countries. Table
3 shows the historical trend specifically for Nigeria. ------------------------------------------------------------------------- Table
1: Official Exchange Rates Per USA
Dollar ($) in selected non-African
Countries ------------------------------------------------------------------------ Country Currency 1980 1990 1994
1995 Mid-1999 Ratio* (1) (2)
(3) (4) (5) (6) ------------------------------------------------------------------------ Austria Shilling 20.7 14.5 12.1
11.0 13.3 0.643 Denmark Kroner 6.5 5.8
6.8 6.2 7.2 1.108 France Franc 5.1 5.1 5.4 5.0 6.4 1.255 Germany Deutschemark 2.8 2.2 1.7 1.6 1.9 0.679 Greece Drachma 30.0 175.6
296.0 242.0 314.0
10.467 Sweden Kronor 4.8 4.5 8.5 7.5 8.5 1.771 Switzerland Franc 1.8 1.7 1.5 1.3 1.6 0.889 UK Pound 0.4 0.55 0.68
0.66 0.63 1.575 Russia Rouble 1.3 1.5
1231.0 3232.0 24.3 18.692 USA Dollar 1.0 1.0 1.0 1.0 1.0 1.0 Argentina Peso 0.25 0.25 0.99
0.99 1.0 4.0 Brazil Real 405.5 650.6 0.85
0.8 1.8 ? Canada Dollar 1.05 1.05 1.34
1.38 1.48 1.41 Mexico Peso 1.01 2.5 3.1
3.5 9.5 9.41 Venezuela Bolivar 4.5 4.0 102.0
170.0 607.0 134.9 Australia Dollar 0.89 0.88 1.62
1.31 1.5 1.69 India Rupee 8.0 15.0 31.1
33.8 43.4 0.417 Japan Yen 290.0 150.5 109.0
99.0 121.0 0.42 Malaysia Ringgit 0.6 1.2 2.6
2.5 3.8 6.33 Phillipines Reso 2.6 3.6
27.3 23.8 38.0
14.6 Singapore Dollar 1.0 1.0 1.6
1.5 1.7 1.7 Indonesia Rupiah 1.25 1.3
2102.0 2267.0 6875.0
5500 Iran Rial 0.6 1.0 1.35
1.4 1.8 3 Iraq Dinar 0.06 0.06 0.25
0.30 3.75 62.5 Saudi
Arabia Riyal 2.5
3.4 3.7 3.8 3.8 1.52 South
Korea Won 260.0
350.0 808.0 795.0
1158.0 4.45 China Yuan 3.75 4.45 5.79
8.68 8.25 2.2 Taiwan Dollar 7.75 8.25 26.7
26.3 32.3 4.17 Thailand Baht 7.9 8.4 25.4
25.0 36.9 4.67 UAE Dirham 5.01 3.75 3.68
3.68 3.75 0.75 *Ratio
= (5)/(1). A ratio lower than 1
implies an appreciation of the currency
relative to the dollar over the years stated ------------------------------------------------------------------------------ Table
2 Historical foreign exchange rates for 30 African countries ------------------------------------------------------------------------ Country Currency 1980 1990 1993
1994 1999 Ratio* (1) (2)
(3) (4) (5) (6) ------------------------------------------------------------------------ 1. Official exchange 2. Parallel (Black) market exchange rate CFA
Count's* CFA Franc 1. 211.3
272.3 283.2 555.2
620.0 2.93 14
countries) 2. 209.5 281.8
288.0 586.4 625.0
2.98 Botswana Pula 1. 0.8 1.9 2.4
2.7 4.6 5.75 2. 0.8
1.9 2.8 2.9 6.6 8.25 South
Africa Rand 1. 0.8
2.6 3.3 3.6 6.1 7.63 2. 0.9
2.7 3.5 3.8 4.8 5.33 Zimbabwe Dollar 1. 0.6 2.5 6.5
8.2 38.3 63.8 2. 1.1
3.3 7.7 9.4
16.0 14.5 Kenya Shilling 1. 7.4
22.9 58.0 56.1
70.3 9.5 2. 8.2
23.3 91.7 66.8
70.0 8.54 Zambia Kwacha 1. 0.8
30.3 452.8 669.4
2388.0 2985 2. 1.3
121.2 531.0 805.4
- 619.5 Uganda Shilling 1. 0.1
428.9 1191.0 979.4 1454.8
14548 2. 75.7
685.8 1515.8 1292.8 1230.5
16.3 Ethiopia Birr 1. 2.1 2.1 5.0
5.5 7.9 3.76 2. 2.8
6.0 13.3 12.0 8.0 2.86 Ghana Cedi 1. 2.8
326.3 649.1 956.7
2647.3 945.5 2. 15.9
360.8 665.7 976.4
2700.0 169.8 Nigeria Naira 1. 0.5 8.0 22.1
22.0 92.3 184.6 2.
0.9 9.3 56.8
71.7 105.0 116.7 Guinea Franc 1. 19.0
660.2 955.5 976.6
1105.0 58.2 2. 41.7
693.3 1156.9 1074.1 1150.5 27.6 Liberia Dollar 1. 1.0 1.0 1.0
1.0 41.9 41.9 2. 1.1
5.5 40.0 45.0
60.5 55 Libya Dinar 1. 0.3
0.3 0.3 0.3 0.4 1.33 2. 0.5
1.0 1.7 1.6 2.3 4.6 Egypt Pound 1. 0.7
1.5 3.4 3.4 3.4 4.86 2. 0.8
2.6 3.4 3.4 - 4.25 Algeria Dinar 1. 3.8 9.0 23.3
35.1 66.6 17.5 2. 10.9
29.8 106.8 128.7
135.0 12.4 Mauritius Rupee 1. 7.7 14.9 17.6
18.0 25.2 3.27 2. 7.8
15.7 18.3 18.4
24.0 3.08 *The
CFA countries (the 14 members of the CFA Zone were: Benin, Burkina Faso,
Cameroon, Central African Republic, Chad, Comoros, Congo, Cote d'Ivoire,
Equatorial Guinea, Gabon, Mali, Niger, Senegal and Togo. Guinea-Bissau
became the 15th member on August 1, 1997) have their currency
pegged to the French Franc, but in January 1994, the CFA franc was
devalued by 50 per cent to CFA Fr100 to the French franc Sources
for Tables 1 and 2: 1. African Development Indicators 2000; World Bank, DC, USA 2. London Economist Intelligence Units World in Summary ------------------------------------------------------------------------ Table
3: Average Naira Exchange Rates (1970
- 2001) ---------------------------------------------------- Year $1 = Naira BP1 = Naira
Head of State ----- -----------
----------- ----------- 1970 0.7143 1.7114 Gowon 1971 0.6955 1.7156 " 1972 0.6579 1.6289 " 1973 0.6579 1.6289 " 1974 0.6299 1.4795 " 1975 0.6159 1.3678
Gowon/Mohammed 1976 0.6265 1.1317 Mohammed/Obasanjo 1977 0.6466 1.1671
Obasanjo 1978 0.6060 1.2238 " 1979 0.5957 1.2628
Obasanjo/Shagari 1980 0.5464 1.2647
Shagari 0.9 PMER 1981 0.6100 1.2495 " 1982 0.6729 1.1734 " 1983 0.7241
1.1216 " 1984 0.7649 1.0765
Buhari 1985 0.8938 1.1999 Buhari/Babangida 1.7 PMER 1986 2.0206 2.5554 Babangida 3.9 PMER 1987 4.0179 6.5929 " 5.9 PMER 1988 4.5367 8.0895 " 6.7 PMER 1989 7.3916 12.0695 " 10.7 PMER 1990 8.0378 16.2419 " 9.3 PMER 1991 9.9095
17.4955 " 6.7 PMER 1992 17.2984 27.8684 " 21.9 PMER
1993 22.3268 33.2522
Babangida/Abacha 56.8
PMER 1994 21.8861
A 33.4252 Abacha 71.7 PMER 1995 21.8861 34.7111 " 78.3 PMER 79.8955 AFEM 127.66 AFEM
1996 21.8861 35.7368 " 81.8 PMER 84.5750 AFEM 135.90 AFEM 1997 21.8861 35.7368 " 84.7 PMER 84.7004 AFEM 136.60 AFEM 1998 21.8861 35.7368
Abacha/Abubakar 88.0-90.0 PMER 85.0004 AFEM 136.00 AFEM 1999 (July) 85.9800
137.4680 Obasanjo 105.0 PMER 94.88 AFEM 145.71 AFEM
2001 April 115.7
Obasanjo 140 PMER PMER
(Parallel Market Exchange Rate or "Black" Market) AFEM
(Autonomous Foreign Exchange Market); official dual exchange rate started
in 1995, and abolished in October 1999 and replaced by daily Inter-Bank
Foreign Exchange Market (IFEM), which in effect is the official exchange
rate. Sources: Central Bank of Nigeria, Statistiscal
Bulletin, Vol. 7, No. 2, December
1996, Table D.31, page 188 for figures up to 1996. CBN Annual Reports
1996-1999; CBN Foreign Exchange
biddings and newspaper reports. ------------------------------------------------------------------------- If we
eliminate the two highest outlier 1999/1990 exchange ratios (official:
non-Africa - Indonesia and Brazil ; official: Africa - Uganda and
Zambia ; parallel: Africa - Ghana and
Zambia), we see that the average
devaluation ratios for the remaining 28 countries in each category are as
as follows: Non-African countries:
Official: 10.5 devaluation ratio
(average of 28 countries) African countries : Official: 48.7 devaluation ratio Parallel: 11.5 devaluation ratio
(average of 28 countries) Africa non-CFA: Official: 101.8 devaluation ratio
Parallel: 20.0 devaluation
ratio (average of 14 countries) If
one understands that the official position is invariably to overvalue a country's
currency while the parallel market would tend to reduce that value
relative to foreign currency (the dollar in this case), then the trend
in Table 2 clearly shows that the devaluation by the parallel market has
almost invariably been tracked by that of the official rate, with the official
African exchange rate actually on average trying to over-correct (by a
factor of 5) for its seeming under-valuation of its own currency. The
non-CFA African countries have fared much worse than their CFA counterparts.
Clearly,
for those who have both the local and foreign currency OUTSIDE the
traditional (and hence easily monitored) banking system - including both
drug and other corruptly-acquired foreign cash denominations - it is convenient
to create an environment for currency speculation and "round tripping"
(buying currency low from the Central Bank and selling it high to
interested buyers at the parallel market), particularly when the impression
or reality of difficulties of obtaining foreign exchange through
the normal official banking system exists. Attempts
by governments to "close the gap" between the official and parallel
markets in order to use ordinary market forces to "drive out the parallel
market " almost invariably have
led to another cycle of parallel market
devaluation followed by yet another official attempt to close the gap,
etcheram, ad nauseum. An inspection
of Table 3 shows that in Nigeria,
for example, a dual exchange regime came into effect in March 1995
when the official rate (at N22/$1) was supplemented with an Autonomous
Foreign Exchange Market (AFEM) rate of about N80/$1, the latter being
in reaction to an existing parallel (black)
market rate of N78/$1. Within
three years, while the official rate was held steady, the AFEM rate inched
up and then held steady during much of the Abacha regime at N85, while
the parallel market rate gained steadily to N90. By July 1999, one of
the first steps of the new president Obasanjo was to in effect depreciate
the Naira by doing away completely with the confusing N22 exchange
rate, with the AFEM rate jumping to N95.
The parallel market did its own
jump to N105. The AFEM was abolished on October 25, 1999 and replaced
with an Inter-bank Foreign Exchange Market (IFEM) regime, becoming
in effect the official exchange rate of note since the government abandoned
the earlier regime of "fixing" an exchange rate all by itself. In
recent weeks, IFEM rates have varied from N110 - 120, while the parallel
market has wavered from N120 - 140 per dollar. In
short, in this official/parallel market situation, we have the tail wagging
the dog, and at the same time, the dog trying to bite the tail in a
never-ending circle of exhaustion and near-death. Until
and unless this chain is broken by OFFICIALLY banning the Black currency
market, this recurrent devaluation of the respective currencies due
to parallel market influences will continue unabated. This first step towards
control of our currencies, of course, does not absolve the government
from ensuring other worthy fiscal and monetary policies, as well
as stemming corruption and diversifying tthe countries' productive capaciites. Epilogue My
conclusion, therefore, is that the Black (Parallel) Market should be banned
throughout Africa, and certainly in Nigeria, because we cannot allow
criminal activity to guide official policy while such activity to continue
openly with impunity. It is not
allowed elsewhere, so why must we
officially hoodwink crime against our currency in Africa? These
are questions that inquiring minds want to know. --------------------------------------------------------------------- References
for further reading ------------------------------ http://allafrica.com/stories/200106080283.html Naira
Rides Higher, Rates Dip in House Hearings The
Guardian (Lagos) June 8, 2001 http://allafrica.com/stories/200106070204.html Why
the Naira is Falling, By Sanusi The
Guardian (Lagos) June 7, 2001 http://allafrica.com/stories/200105250387.html President
Orders Fresh Measures to Shore Up Naira The
Guardian (Lagos) May 25, 2001 http://allafrica.com/stories/200105180229.html Government
Bars Officials From Forex Market Impelled
by the urgent need to save the naira from further fall, against other
world currencies, the Federal Government yesterday took a bold step when
it barred all its officials from patronising there parallel market. It
has also started probing some banks for round-tripping of forex. The
Post Express (Lagos) May 17, 2001 http://allafrica.com/stories/200105170037.html Obasanjo
Bars Govt Officials From Parallel Market President
Olusegun Obasanjo yesterday barred government officials from patronising
the foreign exchange parallel market henceforth, as part of the
strategy to save the naira from further depreciation. Vanguard
(Lagos) May 17, 2001 http://allafrica.com/stories/200105160346.html Central
Bank, Customs Department Now to Brief Obasanjo On Economy This
Day (Lagos) May 16, 2001 http://allafrica.com/stories/200105150265.html Currency
Black-Market Batters Zim Dollar African
Eye News Service (Nelspruit) May
15, 2001 http://allafrica.com/stories/200105140739.html Central
Bank Blamed Falling Naira Panafrican
News Agency May 14, 2001 http://allafrica.com/stories/200105140392.html Naira
Appreciates At Black Market This
Day (Lagos) May 14, 2001 http://allafrica.com/stories/200105110049.html Obasanjo
to Battle Defects in Nigeria's Foreign Exchange Panafrican
News Agency May 11, 2001 http://groups.yahoo.com/group/AlukoArchives/message/48 MID-WEEK
ESSAY: Defending The Naira, Nigeria's Currency - Some, Thoughts Mobolaji
E. Aluko, April 25, 2001 ----------------------------------------------------------------------------- Dr.
Mobolaji E. Aluko is Professor & Chair of Chemical Engineering at Howard
University, Washington, DC. He can be reached on maluko@scs.howard.edu
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