3 Theories Explain Why The Parallel Market Is Still Very Relevant

On Wednesday, we spoke to our Aboki, Buzu to get an understanding of what the street thinks about the new exchange rate policy. In case you missed that article, you can get it here. Our takeaway from that conversation was the fact that the parallel market will still be as relevant as it was pre-floating of the Naira. Why do we say so?

Whilst we believe that the relevance of the parallel market will be on the decline in the coming months if not years, there are major reasons why they remain relevant for the informal and indeed formal sectors of the economy.

41 Banned items — When the Central Bank Governor announced the new exchange rate policy on Wednesday the 15th of June 2016, he took every single item of exchange rate control off the table except the infamous 41 banned items. The CBN on June 23rd 2015 released a list of 41 items which they banned from having access to the official forex exchange market. This directive created a shadow market as importers of these items have no choice but to fund their imports by sourcing for forex in the parallel market. It probably will not be as easy it used to be with most of the liquidity expected to flow into the official interbank market, we however believe a sizable chunk of our importers will rely on the black market for sometime to come. The banned items contain some if the most on demand products Nigerians consume the most. Clothing, textiles, meat, furniture, kitchen utensils etc. We believe, importers will not be deterred by this ban and will continue to rely on the parallel market to fund the import.

Cash transactions — Despite appreciable progress in the online payment space, Nigeria is still predominantly a cash based economy. As such we do not expect that the new exchange rate policy will eliminate the need for Nigerians to rely on cash in foreign currency to complete transactions. A major test for this will be the upcoming Edo State Governorship elections where we the state will be expected to elect a new Governor. Historically, politicians are thought to fund their campaigns with hard currency considering that it is easy to handle and share amongst their followers. The effect of this is typically a spike in black market rates as politicians invade the streets in search for cash dollars. Another example are holiday makers and business travelers. While commercial banks will still be able to sell as much as $5,000 as Business Travel Allowance, some Nigerians travel with far more than that. Funding the balance will mostly be via cash considering that debit card usage are also heavily restricted.

Unstructured Retail markets — One of the tenets of a liberalized foreign exchange rate system is the existence of robust retail end of the market. The retail end which is currently represented by the local Bureau De Change are currently not structured enough to handle transactions in line with the new FX policy. We believe, there might be a need for specialized Bureau De Change operators at the retail end of the market. For example, some can deal in transfer of forex locally and abroad. Others can focus on strictly cash based transactions while some can handle a hybrid of cash and online payments. Without a structured retail market in operation, the parallel market as it stands today will continue to service that space.

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