Parallel Market Rate Appreciating Under Tight Liquidity: Economic, Social and Political Explanations

This paper explores the complex dynamics influencing the appreciation of parallel market rates in African nations amidst tight liquidity conditions. The research identifies key economic factors such as the scarcity of foreign currency, inflationary pressures, interest rate differentials, and speculation, which drive individuals and businesses toward parallel markets. Additionally, social dimensions, including public perception, increased informal transactions, and the role of remittances—are found to impact market behaviour. Politically, the study highlights how government policies, corruption, political instability, and policy ineffectiveness contribute to the deterioration of official exchange rates. While tight liquidity is often perceived as a prudent economic strategy, the findings suggest that it necessitates a comprehensive approach that considers these intertwined economic, social, and political factors to foster sustainable development. From the study findings, it is worth noting that while tight liquidity can be a necessary measure for economic stability, it requires complementary policies that address the broader economic, social, and political landscape. The study offers policy recommendations that, when considered, African nations can work towards reducing the adverse effects of parallel market rate appreciation and fostering a more stable economic environment. The policy recommendations aim at harmonizing liquidity management with broader socio-economic stability, promoting transparency, and enhancing institutional effectiveness to mitigate the adverse effects of parallel market rate appreciation.