On the teeming streets of Lagos, the Nigerian mega-city of 15 million people, the once omnipresent money-changers are going underground.
They’ve become the latest target of authorities desperate to bolster the naira and crush a black market for foreign currency that’s boomed since the crash in oil prices strangled the inflow of dollars and battered the economy. This month, the central bank capped prices that non-bank dealers can charge their customers for foreign exchange, effectively pegging the black-market rate, with intelligence agents threatening to jail anyone who doesn’t comply.
That’s creating a parallel market within the black market, according to analysts at Lagos-based Afrinvest West Africa Ltd. One trader in the Lagos suburb of Surulere, who asked not to be identified as he feared arrest, said he would continue using the old rate with trusted customers and refuse to sell dollars to others. Anyone he doesn’t know may be a government spy, he said.
“The black market will go further underground,” said Omotola Abimbola, an analyst at Afrinvest. “The fact they went as low as getting security forces on the streets shows a new level of desperation.”
Nigeria’s interbank market sets the naira’s official value and is meant to serve businesses. But the scarcity of foreign-currency has forced many to go to licensed bureaux de change and the unofficial, or black, market of informal street traders, both of which sell dollars at a higher rate.
The central bank has made several attempts to defend the naira after it plunged in late 2014 along with crude prices. Governor Godwin Emefiele tightened capital controls and restricted banks’ ability to trade foreign-exchange, then tried a currency peg that deterred foreign investment and worsened the shortage of dollars companies need to pay for imports of raw materials and equipment.
As the economy shrank and inflation soared, Emefiele relented, devaluing the inter-bank rate in June and saying he would let it float freely. The naira slumped 38 percent within two months, prompting central bank intervention that has since held it around 315 against the dollar.
Stock and bond investors are staying away from Nigeria, pointing to the wide gap between the official exchange rate and the black-market one of about 470 as evidence that the central bank is still manipulating the currency. Forward prices suggest the naira will depreciate further on the official market, with 12-month contracts trading at 441 against the greenback.
On Nov. 9, Nigeria’s intelligence arm, the Department of State Services, raided bureaux de change and black-market traders and instructed them to cap their rates at 400 per dollar. As a result, people with hard currency are hoarding it rather than selling at an artificially low rate, according to Haruna Usman, a money-changer in Lagos.
“It’s a struggle even to get someone to sell us $200, whereas before they’d often sell us $1,000 or $5,000,” the kaftan-clad Usman said from the mosque compound where he trades. “Now, they’re only exchanging when they’re desperate.”
The central bank is in no mood to back down. Emefiele said this week that “the security agencies should sustain their checks on the activities of illegal foreign-exchange operators in order to bring sanity to that segment of the market.”
It’s another signal to foreign investors that Nigeria’s currency policy is broken, according to JPMorgan Chase & Co.
“The Central Bank of Nigeria is clearly not ready to embrace a truly free-floating exchange rate and arguably has further undermined the confidence in the exchange-rate regime,” Yvette Babb and Sonja Keller, analysts at the New York-based lender, said in a note to clients on Nov. 18. “These events are likely to deter inflows.”
Nigeria isn’t the first country to clamp down on black-market trading. Egypt also arrested street dealers while pegging its currency’s official rate, until a dollar-squeeze forced it to devalueon Nov. 3.
Nigerian authorities are running out of options and they probably won’t be able to enforce their clampdown beyond this year, according to Teneo Intelligence.
“It absolutely won’t work,” said Manji Cheto, senior vice president at Teneo in London. “This is akin to a person in a room that’s caught fire just slamming every panic button they can find because they don’t know which will open the door.”