What is parallel market? Have you ever heard of the term? Do want to know how this kind of market works? We will give you the answers to these questions and more! Find out what parallel market is, why it emerges and how it is works in Nigeria.
Parallel market definition
Many dictionaries define parallel market as an informal market that exists alongside the official market in the countries with controlled economies, or if the existing market has proven to be insufficient for satisfying people’s needs.
There are many other names for parallel market, such as black, illegal, hidden, shadow, grey etc. Most of these words hint to the ‘wrongness’ of this kind of market. However, it is not always bad or entirely illegal. In some countries, it is a better alternative to what the government has to offer them.
All kinds of things can be sold on a parallel market, but many of those things are usually prohibited (like prostitution, human organs or weapons). In this article, however, we will talk about the semi-legal currency exchange market and why it emerged.
Why does parallel market emerge?
There are several reasons why some countries have parallel currency exchange markets. For example:
☆ The country’s government pegs the national currency at some predefined level to a different currency (usually something universal, like dollar, euro or pound), which does not meet the real market value.
☆ It is illegal for people to own any or much foreign currency, or exchange it at a different rate than the one the government has set.
☆ There is a tax for exchanging money (either one way, or both ways).
There are also the scenarios where money needs to be laundered or it is counterfeit, but those options are completely illegal and usually do not concern currency exchange markets.
A lot of people that earn their wages and salaries in foreign currencies are often dissatisfied with the official currency exchange rates. The parallel market value of the currency is usually more beneficial for people that want to exchange their dollars or euros to the national currency.
Parallel market in Nigeria
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Parallel markets flourish in countries with unstable economies or high inflation. Which is why Nigerian parallel market is so popular. Even though naira to dollar exchange rate has been floating since 2016, official exchange rates do not reflect the real market value of naira.
In reality, there are at least five different exchange rates:
☞ the official one announced by the Central Bank of Nigeria;
☞ exchange rate that banks use to lend each other money;
☞ international money transfer exchange rate;
☞ parallel (black) market rate;
☞ rate for pilgrims (usually religious, those who travel to Jerusalem, Rome or Mecca).
It causes a lot confusion, and this financial situation in Nigeria is very problematic. The main reason why this is happening is because the country is short on dollars. Most of the national reserves of dollars are depleted. It is easy to exchange dollars to naira, but one might struggle to exchange the money the other way.
Naira is also very dependent on the oil prices. As the price for the oil went down, so did naira. Parallel market has already caught up on that, while CBN is still coming around.
Currently the official CBN naira exchange rate differs tremendously from that on the parallel market. Look it up yourself. As of 23.06.2017, the rates were as follows:
Dollar to naira.
CBN. 305 (buying) / 306 (selling)
Parallel. 363 (buying) / 368 (selling)
Pounds to naira.
CBN. 388 (buying) / 389 (selling)
Parallel. 452 (buying) / 469 (selling)
Euro to naira.
CBN. 340 (buying) / 342 (selling)
Parallel. 400 (buying) 412 (selling)
As you might have noticed, the difference is obvious. The most popular exchange option, USD to naira, has the smallest difference in numbers, and even that is more than 60 naira. However, the situation is becoming better as time goes on, as a better supply of dollars slowly reduces the gap between the official rate and the parallel market one.
Until there is a substantial economic reform that changes the way CBN operates, or how the country deals with its dollar reserve, parallel market in Nigeria will remain ahead, as people would prefer to exchange their money there rather than at a bank. But if the government does not see a problem in it, everything will remain the same.
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