The International Monetary Fund (IMF) has explained why dollar scarcity persists in emerging economies, especially sub-Saharan Africa.
In an emailed report, Tobias Adrian, the Financial Counsellor and Director of the IMF’s Monetary and Capital Markets Department, said the wide spreads between bid and ask prices for the dollar were responsible for limited liquidity in the markets in the region.
The naira exchanges at N586/$ at the parallel market and N416/$ at the official market creating N170/$ premium between the exchange rates.
Adrian in the report entitled: “How Africa can navigate growing monetary policy challenges said: “Shallow markets (i.e., markets with limited liquidity) can amplify exchange rate movements and yield excessive volatility. Foreign exchange markets tend to be shallow in many countries in the region, as evidenced by wide spreads between bid and ask prices.”
The bid price refers to the highest price a buyer will pay for the naira exchange rate against the dollar. The ask price refers to the lowest price a seller will accept for the naira against the dollar. The difference between these two prices is known as the spread; the smaller the spread, the greater the liquidity market.
Adrian added that high foreign-currency denominated liabilities are also a key vulnerability in several economies. In the presence of large currency mismatches on balance sheets, exchange rate depreciations can undermine the financial health of corporates and households.