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The official market for the Naira is where The Central Bank of Nigeria (CBN) sets the currency rate and controls how the market operates. The black market, on the other hand, operates outside of the established financial system, and its exchange rates are affected by a variety of variables. These include shortages, supply and demand dynamics, monetary policies, inflation, and market speculation. It is important to be aware that the black market rate is frequently higher than the official rate, indicating the premium paid for the ease and speed of obtaining foreign currency without limitations.

The CBN manages foreign reserves, intervenes in the foreign exchange market, and regulates capital movements among other strategies to maintain the official currency rate. The objective of the official rate is to stimulate international investment, maintain uniformity in currency pricing, and advance economic stability. 

Interestingly, people still turn to the black market to meet their exchange demands. In this article, we want to try and answer the question, why does Nigeria have a black and official market for Naira? Let’s jump in.
 

Causes For a Black and Official Market For Naira in Nigeria
 

Control of Foreign Exchange

Currency exchange is the main activity in the foreign exchange market. The activities of the foreign exchange market are supervised by and subject to periodic reporting by the Bank for International Settlement, which serves as the worldwide bank for National Central Banks in the international sphere. When the currency exchange is done online through forex trading platforms in Nigeria, the CBN and the Nigerian SEC are in charge of regulating activities.

Historically, the Central Bank of Nigeria (CBN) has used foreign exchange limitations to manage the country's foreign reserves and stabilize the value of the Naira versus other currencies. These limitations include restrictions on foreign cash access and the establishment of official exchange rates. Such limitations can halt business operations and transactions. In such a case, some people may turn to black market exchanges to meet their needs.
 

Demand and Supply 

According to the Central Bank of Nigeria (CBN), the foreign exchange market boomed during the 1970s, necessitating the management of foreign exchange resources to avoid shortages. However, as a result of the 1982 foreign exchange crisis, comprehensive exchange controls were now implemented to mitigate such issues and others anticipated. These controls led to a disproportional demand and supply ratio. The growing demand for foreign currency at a time when availability was falling fueled the growth of a thriving parallel (black) market for foreign currency.

When the demand for hard currency (such as the US Dollar, Euro, or British Pound) surpasses the supply accessible through official channels, the black market for foreign currency forms. Demand for dollars is significant across major commercial banks for school tuition, medical expenses, tourism, input imports, and other commodities. 
 

Lack of Market efficiency

A black market for foreign money may also arise due to regulatory difficulties and market inefficiencies. These inefficiencies could include long wait times to get foreign currency through authorized channels, which pushes people and companies to look for other options.

Nigeria's economy is primarily dependent on imports; thus companies frequently require foreign money to pay for imported items. The Nigerian government allows the black market to operate since there is not enough money available from the sale of crude oil, which is the main source of US dollars for Nigerian imports. There may not be enough foreign currency available at the official exchange rate to match demand, which would cause scarcity and the thriving of the black market.
 

The Volatility of Exchange Rates

Oil export earnings are a major source of income for Nigeria's economy. Global oil price fluctuations can cause profits from foreign exchange to fluctuate, which has an effect on the value of the Naira. The CBN-controlled official exchange rate may not always accurately represent the Naira's value on the outside market.

Individuals, businesses, and investors find it challenging to plan because of the unpredictability that comes with multiple exchange rates and speculation. The forecasting of the return on investment becomes quite difficult. As such, such individuals may end up turning to the black market for some stability. 
 

Final thoughts

There may be discrepancies between the official exchange rate and the rates provided on the parallel black market. Due to the greater demand and constrained supply of foreign currency through official channels, the black market rate may be higher than the official rate. Nonetheless, some people may turn to it to meet their currency demands.

In order to make wise judgments and evaluate the state of the economy as a whole, it is essential to understand the variables that affect the rate, how it compares to the official rate, and the effects it has on people and businesses. While buying and selling currency on the black market can be flexible and convenient, it's necessary to think about the economic and legal ramifications before doing so. In some circumstances, some persons engaging in illegal transactions who want to evade official scrutiny would turn to the black market to avoid getting caught.

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