Homework answer

In my last post I asked a question: Brexit did something else to the Nigerian currency black market. What was it? Answer follows

What typically happens when you have an official rate exchange rate that is fixed too low by fiat is that a black market appears. The rate at the black market is usually a bit more realistic than the official rate. In certain cases, like the Nigerian case, the spread between the official and parallel rates is a lot.

However if the authorities decide to stop their fixed rate policy and allow the official rates float then both markets should converge. The official and parallel rate should get together and meet somewhere. Of course the Nigerian case is always special. Some sections are still banned from the official market but still, a float should have meant a convergence of both rates.

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spread

We did see some convergence. The black market rates started falling and the official rates rose. We saw a slow convergence when we thought the official market was actually a float. So what did Brexit do? Brexit stopped the convergence that was happening. Brexit demonstrated that the official market wasn’t really what people thought it was. And since Brexit the convergence between the two markets hasn’t returned.

The morale of the story is that black market actually works like markets should work. It responds to news, shocks, and external conditions like every other market. It is proof that markets can work in Nigeria without the need for meddlesome politicians trying to micromanage everything.

Or maybe its just a coincidence.

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