Naira struggles: Mind the gap
In the town of Bali there is a market, Yelwa, where yams are sold. The chief in Bali decides who can enter the market to buy or sell. In the beginning, the chief did not really care who came or went. Across the river in Bali is another yam market, Ebba, where the chief has no authority. In Ebba anyone can come to buy or sell. Since anyone in Bali can go to whichever market they like with ease, the price of yams in the two markets is about the same.
One Tuesday the chief in Bali decides, for reasons unknown, that all the descendants of Suntai can no longer come to Yelwa market to buy yams. The Suntai family is big in Bali making up about 20 percent of the population. The Suntais vent their anger at the rules but eventually decide that it is not worth the fight. They also have the option of crossing the river to Ebba market where the chief has no authority. And so they cross in their droves.
The people selling yams in Ebba market see the new crowd coming and say to themselves, “See crowd oooo. This yam we are selling no dey enough. We must increase price now and make money from these people.” At the same time the yam sellers in Yelwa look around their market and see a crowd that is not as big as it used to be. The Suntais have been banned and they used to be big customers. They say to themselves, “If we want this yam to sell today, we have to reduce the price. If not, nobody go buy am.” Suddenly yams in Yelwa are cheaper than in Ebba. The yam sellers in Yelwa are still loyal to their chief so they stick around and continue selling.
The next Thursday the chief in Bali again decides to ban the Wakils from Yelwa market. The Wakils, also a big family, complain but have already heard what happened to the Suntais. They decide not to bother about the ban and just go to Ebba market across the river. The people selling yam in Ebba market see an even bigger crowd coming to buy their yams. They rejoice again and increase the price again. “If all of you want this yam you must pay o. If you no wan pay give chance, another person dey your back wey go pay”.
Meanwhile, at Yelwa market the crowd is even thinner. One of the yam sellers in Yelwa gets a call from his friend across the river. Yams are selling in Ebba for double the price. The seller decides that loyalty to the chief is not that important. “Na loyalty we go chop?” The seller packs up and carries his yams. “Where are you going?” other yam sellers ask. The seller says he is taking his yams to Ebba where people are paying double. Many other sellers follow suit.
On Sunday the chief of Bali is at it again. The chief decides to ban all the Lugujas from Yelwa market. The Lugujas do not bother debating. They just go across the river to Ebba. At this point the few yam sellers in Yelwa who were loyal to the chief get fed up. Almost all of them decide to carry their yams and go to Ebba to sell there. Even the few yam sellers who are afraid to cross the river instead decide to stay at home. The Yelwa market has become a barren wasteland. The only person left selling yams is the chief’s cousin who is selling yams from the chief’s own farm. The chief finally notices that Yelwa market is dead and calls his adviser to explain what happened. The adviser says “But chief, you are the one that stopped the Suntais, Wakils and Lugujas from coming to the market. You drove them across the river and all the sellers have gone there too.” The chief replies, “But I had very valid reasons for sending them away.
Honestly, the reasons were valid”. “Chief”, says the adviser, “the reason you sent them away does not matter. All that matters is that where the buyers go, the sellers will go as well. If you want the market to come back to Yelwa then you must let the buyers come back as well.” This story is an allegory of the Nigerian foreign exchange market. The Central Bank of Nigeria, in its quest to fix the exchange rate implemented rule after rule restricting who could buy forex officially. The rules pushed buyers to the black market and resulted in the black market rate moving far away from the “official” rate. The more rules the CBN implemented, the further away the black market moved. The reasons behind the rules are irrelevant. All that matter is more rules lead to a bigger gap between the official and black market, and the gap is a major factor behind the economic instability the country is currently going through.
As we think about the road out of recession, the CBN has to focus on getting back to macroeconomic stability. We cannot come back if there are two exchange rates for the same currency. The road back to recovery requires closing the gap between the two markets, and closing the gap is all about relaxing the rules on who can participate freely in the official market. The restrictions on BDC’s participating need to be removed. The restrictions on bank trading need to be relaxed. Finally, the 41 items on the exclusion list also needs to go.
Nonso Obikili is director of applied economics at the African Heritage Institution and tweets @nonso2. The opinions expressed in this article are the author’s and do not reflect the views of his employers.