To curb the huge disparity between the official and the parallel market, a capital market analyst, David Adnori, has called on the federal government to organize a single foreign exchange market for operators in the country.
Speaking with journalists, Adnori, stated that the unification of parallel and official into a single market will show a genuinely floated and liberated FX market that will shore up the value of naira.
“In a case of floatation, the market mechanism determines the price and in this case, the market will be subjected to demand and supply. That’s why we are saying it’s a misnomer to have a dichotomy where we have an official and parallel market operating in silos. The responsibility of the government or the monetary authority that controls the monetary policy should be to organize a single and perfect market wherein all economic elements in the economy will be participants.
“So, if you have a market-based exchange which is currently occurring a little bit on FMDQ as it is only for official market activities but, this one I am calling for should incorporate BDC and other economic elements,”Adonri, the executive vice chairman of Highcap Securities Limited stated.
He stated further, “If the Central Bank of Nigeria (CBN) and other stakeholders are able to come together to properly constitute a proper FX market that will constitute a single clearing rate at the end of the day, then we will have a genuinely floated naira where market mechanism determines the exchange rate.
“As it is now, whether the naira is depreciating or not, we are moving toward the real value of naira irrespective of lack of convergence between the parallel and official market,” he stated.
The capital market analyst further explained that with the deregulation of the foreign exchange market, the dynamics are determined by the forces of demand and supply.
“The forex market has been deregulated and the price of naira is being determined by the forces of demand and supply in the market, especially the parallel market. The parallel market reflects an ideal market situation because that is where most users go to meet their forex demand so, I don’t think the government has a goal in influencing the price of naira at the parallel or Bureau De Change (BDC) because it’s purely what the operators see that they sell.
“The prices that they buy, they add little and they sell and since they are not manufacturing this hard currency they have to wait for those who have the currency to sell. This is purely driven by demand and supply and the only area the government can come in is the official market where they can intervene if they have excess supply by increasing supply to meet demand and the intervention means a deviation from the market reform where naira has been floated.”
Android stated that the exchange rate differential is currently the real value of the nation’s economy and can only be reversed through intense production and Export.
“In the current situation, we are having a market that reflects or closely reflects the real value of the naira. What the economy is able to supply to the market is the current market price and value of the naira against the dollar and that’s the strength of the economy right now.
If the government is to enhance supply, then, they should look at the dynamic of supply and come up with policies that will aid supply into the market. However, if the demand is frivolous, they can throw up monetary policies to stop frivolous demands.”
The main challenge is the supply side of the economy. The supply side is worse and the demand side is increasing with the population growth, the country is overpopulated and that puts a lot of demand on consumption and consumption consumes a lot of hard currency and on the supply side, the economy is not productive. The productive areas have been damaged through insecurity such as banditry and other areas are not performing.
“If the areas that will reduce the demand for forex are not performing, supply will be affected so the government can come into those areas with appropriate policy to provide an enabling environment,” he stated
