Problem Definition and Analysis
Today, the Naira officially exchanges to a US Dollar at 199.02, pegged by the CBN. A scan through the unofficial (black) market value of the US Dollar is between 330 to 400 N depending on where you are in Nigeria. A disparity of over 70% between both rates is definitely an alarming premium. In parallel (dual) foreign-exchange markets which are extremely common in developing countries (Nigeria is one, surprise!), a market-determined exchange rate coexists with one or more pegged exchange rates.

Countries resort to pegging their official rates and allow a parallel floating (i.e. black market) rate for reasons ranging from
a. Protecting International Reserves (like Nigeria is doing today);
b. Managing severe Balance of Payments (BOP) crisis. Countries use BOP to monitor all international monetary transactions at a specific period of time. Simply put, if a country has received money, this is known as a credit, and if a country has paid or given money, the transaction is counted as a debit. Theoretically, the BOP should be zero, meaning that assets (credits) and liabilities (debits) should balance, but in practice this is rarely the case. Thus, the BOP can tell the observer if a country has a deficit or a surplus and from which part of the economy the discrepancies are caused.(1); and
c. Manage Inflation especially where there is significance dependence on importation of foreign goods. (This is largely what PMB and his advisors were thinking when the Buhari administration says it does not want to 'destroy the Naira' by devaluation).

In summary, parallel exchange rates are more likely to be adopted when economic performance of a country is bad. Another problem is determining of the right parallel exchange rate, because evidence indicates that macroeconomic fundaments (such as fiscal deficit, credit policies, and so on) matter most but does not protect from round-tripping by the privileged few as the rate premiums are usually large.

A 1994 World Bank research(2) of 8 parallel market case-studies (in Argentina, Ghana, Mexico, Sudan, Tanzania, Turkey, Venezuela, and Zambia), disappointing experiences. Most of these countries tolerated high premiums for long periods, which harmed the allocation of resources and growth. In most cases, it leads to selling of foreign exchange rate where a few rent seekers with access to forex at official rates thereby harming the allocation of resources and growth. Other studies have also not shown parallel markets to help economies that practise them on the long run.

Most countries tolerated high premiums for long periods without clear gains. In Nigeria's case, the first documented case of parallel market was in 1980 under Shagari's administration when the Naira officially exchanged at 55 kobo to 1 USD and at 90 kobo in the floating market(3). This practice was brief and abated only to return in 1985 under Babangida's regime at rates of 90 kobo to 1 USD officially and 1.7 N to a USD at the floating market. This is at an abhorrent premium of almost 90%.

Babangida, after forcefully taking over power in August 1985, accepted IMF and World Bank's precondition for borrowing. This is the famous Structural Adjustment Programme (SAP). In a recent expose blog-post by Eloho Omame(4), the economic issues that lead to SAP include 70% oil prices crash to below $10 per barrel and a 75% fall in government revenues between 1980 and 1986, an (officially) overvalued Naira and struggling non-oil sector. This sounds like 2015 to me when Goodluck Jonathan handed over power after his electoral loss to Buhari.

SAP's was meant to promote a floating exchange rate, encourage privatisation of government enterprise and relax import restriction carried from the previous Buhari regime. Inflation due to exchange rate relaxation was to be managed by tight fiscal policies.

Suffice to say by the time Babangida handed over power (8 years after the introduction of SAP), to the interim government of Shonekan in 1993, the Naira had been officially devalued to about 17 N to 1 USD while the parallel market was at 22 N to 1 USD. The parallel market premium was at an acceptable 30%. This is the only fond memory from Nigeria's journey through SAP. Some historians claim that the first couple of SAP year's witnessed a brief return to economic growth, increased net exportation, manufacturing and agrarian activities.

SAP is better remembered for the erosion middle class due to very slow per capita income (mostly salaries) while the Naira devaluation continuously. The perceived high level of corruption under Babangida's regime further worsened the reception of SAP inflicted pains. Ghana and Zambia also implemented SAP to only see underwhelming benefits. Depending on which schools of thought you belong to, SAP is a good programme that suffered due to poor implementation; or is a bitter unnecessary pill forced down the throats of desperate African countries by the Bretton-Woods 'neocolonialists' (see Ogbimi's thesis, 5). The jury is still out on this.

So far, we have elucidated two key points in the problem definition, that
1. Parallel Markets arise mostly from the unwillingness of governments to devalue their local currencies in times of recession. This usually ends up being detrimental to such economies on the long run.
2. Where free-fall devaluation has been allowed to happen (e.g. under SAP), it does not necessarily bring economic succour to .affected countries.

A Solution
Nigeria would be right to scrap it's parallel market system and shift to a managed float system to encourage export if we had put in motion the right and effective policies to diversify our economy in the times of trade surplus especially between 2010 and 2014 as shown in the figure below (driven by >80USD/barrel oil price, 10):

www.nairaland.com/attachments/3420658_screenshot20160219at20_59_56_pngb62f23ed3800e5f9eff623d3419bd2f1

Clearly this diversification of the economy did not significantly happen under Jonathan's administration. Political pundits may want to paint a different picture but we know the painful truth.

This takes us to corruption. This is a flogged issue but the point to be made here is Nigerians have to support the current anti-corruption efforts no matter whose ox is gored. Corruption is the major reason Nigeria did not take advantage of the various surpluses in its history. When funds meant for infrastructural development and to support private enterprise are stolen by public officials, all policy planning efforts are useless.

In essence, in the short term, due to the aforementioned lack of economy diversification in Nigeria, I support the current Naira pegging by the Buhari administration but only for a little while (in my head, 2-3 years seem right). This is to allow the government enough time to increase power generation and transmission capacity by at least 4,000 MW (very aggressive but doable), revamp local refining capacity, and restore functional railways and road network system. Steel production is a must (Ajaokuta, dry bones must rise again). Farmers have to be encouraged. Too much food is wasted in the time of harvest due to lack of farm to market and storage capacities. All of his should include both public and private enterprise in this development. Foreign borrowing is allowed to achieve the outlined, so long as the terms are not enslaving or will not deviate Nigeria from the charted course.

All these, coupled with a hopefully non-existent insurgency in the North-East or Niger Delta by the end of the next couple of years, which have been major drains on Nigeria's hard earned foreign exchange earnings, should herald a new a phase where we can promote an economy ripe for export by devaluing the Naira and scrapping parallel markets, with increased local manufacturing and sufficient refining. We have to scrap foreign exchange parallel market sooner than later. Nigeria's long history with parallel market has not been favourable.

Again, for this dream to actualise, corruption must be fought to a standstill. No compromises. Before the parallel markets are scrapped, any body with access to officially sourced USD must have no affiliation with any Bureau De Change. Harsh punishments must be put in place against offenders. The standard of education- technical and commercial have to be addressed especially if we want to encourage foreign business to outsource jobs down to Nigeria. FDI's importance cannot be overemphasized.

There is hope. The controversial 2016 budget is meant to increase Capital expenditure like never experienced before in Nigeria (30% of the total budget). But, corruption took over immediately . Buhari is wrestling to regain ownership of the budget from the various parastatals as we discuss. Also, we may be in the worst year of oil price fall and Naira depreciation in the parallel market. It takes discipline to hold steady to laid out plans and strategy because it will only get better in a couple of years.

The onus on us as citizens is to support our leaders so long as they stick to the agreed path no matter how difficult or palatable.

Note that I have refused to discuss longer term solutions like resource control determination and fiscal decentralisation. These would be a topics of future debate(s).

Nigeria will be great again. Thanks for your patience.

praxisnetworks:
If you're not a trained economist then shetop.

I hate being scammed.

"The gap between the black market and the official rate is unusual. If you now say let us bridge the gap, the least you can do is move the gap from N200 to N300 to a dollar and hope that the black market rate would still stay at N340 or N350 to a dollar. But will it? The answer is no. The Black market rate will shoot up to 400 or 500 Naira to a dollar. But let’s assume that they take the first step and they say devalue to N300 to move it closer to black market rate. What immediately happens? The price of fuel that they are applauding that we are not paying subsidy on, will suddenly shoot up to N130 or N140 per litre. Do you think Nigerians will sit down and say ‘things are bad, let us accept it as it is’? Just because of the exchange rate.

And then there is the stock market which is over N8 trillion-only about $40 billion. If it goes N300 to a dollar, the stock market will fall in value from over $40 billion dollars to a little more than $20 billion dollars. This will also be just because of the exchange rate. And if the official rate still continues to chase the black market rate and it goes to N400 or N500 a dollar, eventually the stock market would be reduced to less than $2 billion [/b]dollars, even though the buildings are still standing and people are still trying to produce. It is a serious issue. [b]And if you owed any money in dollars, you are in trouble. If you owed $1 million you would now be looking for not N200 million, but N300 million to pay. Where would you get the N100 million extra? A lot of people would commit suicide."

LRNZH:


Lol! You have been scammed a long time ago.

989900:


-- Henry Boyo.
I have 3 other topics on devaluation; you can read them.
Devaluation, is a cosmetic solution, or symptomatic solution if you will, to an underlying cause -- especially in our case -- where are our exports?!

It's like taking paracetamol for stage 4 cancer, and hoping that cures! We have an endemic problem here y'all!

praxisnetworks:

Modath scammed me preaching $1 to 1 Naira.

LRNZH:



But to think of it, 1N to $1 is not necessarily as economic advantage especially if we want to boost exports in the future. Read the OP.

praxisnetworks:

Mo scammed me preaching $1 to 1 Naira.

mrphysics:
@op you have really done a nice work. I love the way you unbiasedly pen down your point.
From the past to where we are today, and from different governments.

Do you think that the cause of this current economic situation of Nigeria is caused by the present administration
please give with reasons why the previous administration didn't experience the high exchange rate.
Just for the benefit of some wailing Wailers in NL. because I know the answers. thanks

OrlandoOwoh:
Nice piece! You brought to my memory the days of Prof. Ogbimi's TPD in OAU, Ile-Ife.

LRNZH:


I don't really know him/her but he/she does not agree with SAP policies judging from his/her works.
Thanks for enlightening me.

praxisnetworks:

Modath scammed me preaching $1 to 1 Naira.

talk2myles:
"economic crimes" such as bribery, drug-
trafficking, and embezzlement were added
to the legal code for capital punishment...

the above is what we really need to fight corruption.

praxisnetworks:
If you're not a trained economist then shetop.

I hate being scammed.

Firefire:


Serious scam oooo, by APC.

payosehtor:
thank God we stiil some nigerians who chooses objectivity in reasoning rather than weilling like ipob, A norviss (economics) is expected to listen to those who can atleast attempt the answer & complement them or keep quiet. thanks to the op.

Nobody has a monopoly of knowledge. We are all meant to learn from each other. Bring your two cents while I bring my two kobo