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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.

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  • NonPartisanElder

    This allegory doesn’t appear to fit. Is yam the dollar? Is Bali’s Yelwa market the CBN and Ebba market the BDC? Where in Nigeria is the dollar cheap as to align with the surplus yams in Yelwa? CBN? Equalisation of exchange rates at the CBN and BDCs as well as removal of restrictions on import items will not solve the problem of the falling value of the Naira in any significant way as long as our economy remains heavily dependent on importing and consuming all forms of products and materials from other countries while we depend almost absolutely on the manipulation-prone foreign exchange earnings from export of crude oil. We must strategise and discipline ourselves to produce most of what we consume. I am not an economist, not to talk of applied economics. But these facts are very self evident.

    • Ogom

      It seems Comprehension is a problem in Nigeria.

      The story is about how the “chief” creates more problems by restricting the market unnecessarily. He creates price differentials by banning certain groups from buying or selling in the market.

      These differentials are then exploited by rational actors, who move “yams” from one market to another for easy profit.

      This system is obviously inefficient at allocating a scarce resource and prices remain high.

      If the “chief” were to un-ban participants and anyone can buy and sell from whichever market they chose, there would be no incentive for this round-tripping of “yams”. The difference in prices between the markets would find an equilibrium BELOW the cost of transporting yams from one market to the other.

      • Ade Richie

        The solution is local manufacturing as the other man stated, not removing ban on those produces. I appreciate the your simplistic analogy but the case is far more complex that it sound. Any rules or manipulation outside location production is waste of time.

        • Ogom

          It’s not “my analogy”. I was simply explaining my interpretation of the writer’s analogy, which is far from “simplistic”.

          Okay, so you say “local manufacturing” is the solution. I say, definitely LONGER TERM. There are reasons we don’t have much manufacturing in Nigeria today and we don’t have to dig too deep to uncover the reasons.

          I also have to ask, where are these factories supposed to suddenly materialise from? Who will invest the capital and at what rates of interest in such a high risk environment? How long will it take to set up factories that will supply ALL our needs for every single product currently being imported?

          In the meantime, the government/CBN is making life infinity harder for its citizens with its poorly thought out policies.

          • Jamie Jones

            Understanding is not common, people bring emotional and partisan politics into it. Of course we all want manufacturing but where is the infrastructure? And as you rightly pointed out monetary policy is self-harming as was pointed out before and has been consistently pointed out.

        • William Norris


          Devaluation of the naira, in my opinion, is an excellent way to DISCOURAGE IMPORTATION and create consumer DEMAND for locally manufactured goods.

          Just curious, seriously – HOW would you make local manufacturing happen?

    • Nonso Obikili

      This story is not really about the rate. That is a different story. This story is about why there are two prices for the same dollar and how to not have two prices. Having that gap between the official and parallel markets is a big problem regardless of what the rate is.

  • abiamone

    This is a good example of using a micro-economic activity to illustrate the ramifications of a misplaced macro-economic policy. In advanced countries, the prevalence of bureau de change is to facilitate tourism by making foreign and local currencies available almost at every corner. These bureaus charge a small commission for their service. In Nigeria, the phrase “parallel markets” is used to distinguish almost the independence of the BDCs who seem to buy hard currencies at stipulated prices and sell at exorbitant prices. As a developing nation, we should follow examples that are commensurate with our understanding. Suppose the central bank took control of all hard currency inflow into Nigeria, particularly the millions sent in by Nigerians in diaspora? The gap between the cost of dollar when bought from the banks and when bought from BDCs would be closed. This in turn will make monetary policy more effective.

    • Ogom

      The CBN has recently “taken control” of diaspora inflows into Nigeria, by licensing 11 independent money transfer companies.

      The result? The “gap” got wider.

      Read the essay again. Take your time to take in its meaning.

    • Nonso Obikili

      As Ogom said, the more rules, including the central taking control of the inflow of hard currency, the further away the black market moves. The goal should be an inclusive market where all can trade freely without too many restriction. That will close the gap between the two markets. Admittedly some are necessary.

  • William Norris

    Here’s the truth.

    Fixed OFFICIAL PRICES of any kind tend to be a SUBSIDY. In Nigeria PETROL, HEALTHCARE, UNIVERSITY EDUCATION, FOREX and many other things bought via government channels are priced CHEAPLY below their REAL PRICES.

    The PEOPLE of Nigeria like that subsidy. Even government jobs are a subsidy. Surprise? Government workers in Nigeria produce NOTHING but get paid no matter what. My favorite examples are State Water Boards, 37 of them including Abuja. Thousands and thousands work in those departments producing……NOTHING.

    So the struggle in Nigeria is to RETAIN SUBSIDIES, THE PEOPLE are constantly demanding subsidies because they’re too lazy, unintelligent, craven or whatever else to imagine any other way of acquiring the goodies of life. The tribal dimension is that each Nigerian wants to improve their ABILITY TO GET THE SUBSIDIES by voting in their own tribe to control the Federal Government.

    So Nigerians are GENERALLY OPPOSED to devaluing the naira because it’s a SUBSIDY. Higher naira value enables them to get MORE DOLLARS so they can buy imported goods rather than produce them via hard work. That was the same deal with fuel subsidies in Jan 2012.

    As an asided, it’s interesting to note that Blacks or Negroes in the UK & USA also have high dependence on welfare, which are cash subsidies paid to those who either can’t or refuse to EARN a living wage.

    That’s all. I suggest the Federal Government should impose a $1 = N1 parity with the dollar. For one thing President Buhari promised that during the campaign. I mean, if devaluation is so wrong then the opposite should work wonders for the economy. Worth thinking about.

  • Folajimi EfJay Okunrin-mejo

    Brilliant article. Let the market control i

    tself without barriers and a fair price is generated.