The political economy of BDCs and black market premiums

24037-d075ae-1Bureaux de change (BDCs) and their cousins, the road side black market dealers, need no introduction. They exist in almost every town across the country. In most towns, there are whole streets associated with currency trading, and almost everyone has a guy that can be called for quick foreign exchange transactions. In a way, this feature is not unique to Nigeria. BDCs exist in many cities around the world although they are mostly associated with tourist locations.

Nigeria however appears to be different. As at last count, there were almost two thousand registered BDCs not including the unregistered road side money changers. Although there is technically nothing wrong with having that many currency dealers, the obvious question is why? Why do we have so many BDCs when other countries with much larger economies and much more foreign transactions have fewer?

To answer that question, it is useful to understand how the Nigerian state functions in terms of political patronage. Much has been written about the history and origins of the Nigerian state but we can summarize it like this: it is essentially a set of political actors who position themselves via various institutions to extract as much value as possible from whatever economic activity is going on in Nigeria. We typically refer to it as grabbing their share of the proverbial national cake.

Since the discovery of crude oil in commercial quantities, the dominant ingredient for the national cake has been crude oil. The black gold in the ground. Crude oil is extracted and sold on international markets for US dollars. Whatever dollars make it through the NNPC get dumped at the central bank for sharing by the Nigerian state. The Nigerian state doesn’t share dollars though. They share Naira. The dollars must be converted to naira which brings us to part one of the puzzle.

The second part of the puzzle is based on a feature of the Nigerian economy. Much of the Nigerian economy is informal. Informal in the sense that registration and documentation for a large part of the economy is unheard of. Few have the time or patience for pesky rules and procedures. We just want to transact business and get on with it.

When you combine crude oil dollars flowing to the central bank with an informal economy that is allergic to unnecessary procedures, you create room for political middle men. The guys who buy the official dollars from the central bank and distribute it to the informal economy. Crucially, the rewards to the middle men depends on the difference between the price they buy from the central bank and the price they sell to the informal economy. The larger the spread between the two, the larger the rewards on every dollar sold.

The obvious next question: Why can’t anyone just buy from the Central Bank? This is where the political patronage comes in. To buy from the apex bank, you need a license. Those licenses don’t come easy. Excluding banks, you need to be politically connected to get one. Not surprising then that the owners of BDCs typically include politicians, traditional rulers, high ranking officials, and former Central Bank staff. In fact rumour has it that part of the unofficial retirement package at the Central Bank was a BDC license. There’s another case where one traditional ruler allegedly owned up to ten BDCs. Why own ten BDCs and not one big BDC? Apparently at the time allocations were given per BDC, and so more BDCs meant more allocations and more rewards.

In summary, the Nigerian state has created a whole system of political patronage around converting oil Dollars to Naira, distributing rewards to politically-connected friends via this process. The rewards depend on the spread between official and black market rates. The network of political patronage also explains why the foreign exchange market quickly goes berserk once there is a shock to the oil price, which reduces the inflow of dollars. The network senses the opportunity for an increased spread between the official and black markets and starts to put pressure on policy makers to implement policy to increase the spread. The network also quickly turns it claws to others sources of inflows. You then start to hear rules like “exporters must sell their forex to so and so at this rate”, or money transfer companies must sell to BDCs, and so on. As we now know, this kind of patronage and foreign exchange market has severe consequences for the economy.

So how do we get rid of this patronage and the resulting spread? The first step is to simplify the procedures involved in buying or selling foreign exchange. The simpler the procedures, the less likely it is that people and businesses will resort to road side dealers. If people and businesses buy from official sources, then the spread will drop to minimal levels. The second step is to liberalize access to official forex purchases from the central bank and move away from allocation to auctioning and markets. If anybody can buy officially from the Central Bank then the spread will disappear.

These policy suggestions are not new. In fact, we have had periods in the past where they were implemented successfully. Here is hoping our policy makers can navigate their way around the politics and find their way to a credible and sustainable foreign exchange market.

Nonso Obikili is an economist currently roaming somewhere between Nigeria and South Africa and tweets @nonso2. The opinions expressed in this article are the author’s and do not reflect the views of his employers.

In this article:
Bureaux de ChangeNNPC
Receive News Alerts on Whatsapp: +2348136370421

  • Olumide Soneye

    This writer just capture it all. Naira was about N260 to a dollar as at this time last year and if CBN had sold Naira at say N262 last year, black market would have been totally eliminated. But then, Emefiele would have been sacked. Emefiele, very smart. He knows how to play Nigeria game very well. POLITICAL PATRONAGE.

  • charlie

    Emefiele is the worst cbn governor. The whole mess happened under his watch.

    • lord of jaspers

      ably supported by d grand dullard of daura! aftall most of d black market dealers r his northern brodas!

  • Jimi Adewole

    I’m no expert in fiscal policy, but wouldn’t the writer’s solutions subject Nigeria to complete dependence on a foreign currency, ergo foreign policies? The naira isn’t worth much; if suddenly everyone had access to dollars, wouldn’t I be paying the grocer, the cab driver and my school fees in dollars and cents a year from now? How well does that bode for Nigeria’s sovereignty or CBN’s autonomy from foreign influence. Please respond.

    • lord of jaspers

      everybody can not get d dollar bcos most pple dont nid it, d reason d naira is fallin nw is bcos d pple dat nid it r not gettin it, while d cbn kip sellin it to middlemen! it is d same tin dat is happnin to petrol, kerosine nd gas! d solution is deregulation!

  • the writer view represents the same old economist solution we ve with us .however,the forex crisis is induced one that external forces like the IMF/World Bank interest is played even if the suggestion by the writer is taken as policy ,the known forces with their dictate master that is the American govt will not allow your currency to work meaningfully for you.l hope the writer as an economist no that what economist like him alluded to as our challenge in this regard is because we import everything and not an an industrialized his suggestion may as while do little.But,l agreed to an extend with him that we need to follow procedural to get things done,as for market forces and auctioning he suggest,l say no to that because the same political patronage,he talk about,would make sure things are done to favour the ruling class.

    • lord of jaspers

      how come d americans r stopping nigerian currency from working, but dey r not stoppin d chinese, d south africans or evn d Brazilians, to mention but a few, how com evry nigerian trouble is caused by foreigners?

    • Ade Ade

      O boy….that so called “writer” , no be moinmoin o! Na SERIOUS research economist o!….Pointedly, na even Professor sef- in hiding. Not all these half done ones that comment. Read his blog and you will trip……

  • Ade Ade

    “The dollars must be converted to naira which brings us to part one of the puzzle”… Nonso, please treat this “Part One” puzzle. Grinding into it from your perspective, would be a very interesting read. I beg, pls do……..