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.

 

 

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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

 

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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.

 

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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.

 

 

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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

 

 

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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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Copyright Africa Economic Analysis 2001