CBN’s bid to discourage the increasing use of Dollar for business transactions may prove helpful for the Naira and indeed, the economy?
The reported move by the Central Bank of Nigeria (CBN) to roll back the dollarisation of the nation’s economy is commendable and we hope the apex bank would use the policy to restore confidence as well as stabilise transactions in the local currency. The policy, if and when implemented, should discourage the present excessive dependence on the US Dollar for transactions within the country. Furthermore, it should also discourage the prevailing situation where hotels, airlines and other leading service providers have increasingly denominated the prices of their goods and services in dollars instead of the naira.
For some years now financial dollarisation of the economy had resulted in a gradual eclipse of the naira with the USD becoming the official currency of transaction in several sectors of the economy.
The foreign airlines are the worst culprits as they hardly sell tickets in the local currency as though it was a taboo to do so. This is inimical to our economic wellbeing as it puts undue pressure on the nation’s foreign reserves.
But given that the idea has been tried before in the past and it failed, we ask the apex bank to explore all the salient issues before they formally announce the policy. This is because dollarisation may be no more than a response to a problem, which in this instance is the weakening of the local currency. It is a given that under conditions of high inflation and depreciation, economic agents usually ‘hedge’ their bets with local currency losing one of its key features as a store of value.
The point that should be underscored is that it is easier to make a law to force every hotelier or airline or even landlords to state their rates/ prices in Naira, than to enforce such enactment.
Because if the past were any guide, they will simply start ‘forward pricing’, in which case today’s prices will suddenly become higher. A simple example: if the current rate for a standard room in a hotel is, say N16,000 – an equivalent of one hundred dollars, the owner/manager could anticipate that the value of the local currency will go down by a certain percentage in the coming days/weeks, etc. and therefore factor in the ‘expectations’ into the current pricing.
This perhaps explains why at virtually all highbrow hotels in the country today, the room rates keep changing given that they have an ‘expected exchange rate’ and a dollar value for each room. Because a lot of their inputs are imported, they want to preserve the ‘dollar value’ of their revenue in which case the dollar becomes an anchor currency.
Unfortunately, this dependence on foreign currency is crippling the local economy and holding back the exchange rate of the naira from appreciating against major international currencies, no matter how hard the CBN tries. For instance, it is currently costing the commercial banks no less than US$200 million in logistics to import the dollars required for settling payments to recipients of money transfers. Thus if the CBN policy comes into effect, it could deflect the pressure on banks as these recipients could be persuaded to take some part, if not all of their money, in naira equivalent.
There is no doubt that the US dollar is the currency of choice for international financial transaction, but what is not acceptable is a situation whereby almost all transaction in Nigeria is anchored on an offshore currency. The point must be made that no foreign currency should be allowed to thrive at the expense of the local currency. If the naira must be currency of first choice in the ECOWAS monetary union, its value has to be stabilised.