Ending the Dollarisation of Nigeria’s Economy

There is need for a fundamental solution to the dollarisation of Nigeria’s economy, writes Obinna Chima

The recent depreciation of the naira to about N613 to a dollar on the parallel foreign exchange (forex) market has remained a source of concern to a lot of Nigerians.

Whereas the present high crude oil environment ought to have resulted to exchange rate stability and improved forex inflows for the country, the reverse has been the case, which presages challenges in the economy. More worrisome is the dollarisation of the Nigerian economy which has seen some property owners, delegates at some political parties’ recent primaries allegedly being bribed in dollars, airlines and school owners among others, demanding payments in dollars.

All these contribute to the weakness of the naira exchange rate and distorts monetary policy transmission despite increased efforts by the Central Bank of Nigeria (CBN) to strengthen the naira through its intervention in the forex as well as its development finance initiatives.

Dollarisation which is the use of foreign currencies as a medium of exchange, store of value, or unit of account has emerged as a key factor explaining vulnerabilities and currency crises.  The CBN had threatened to prosecute anyone found transacting business in the country with foreign currencies as medium of payment.

Provisions of the CBN Act of 2007, states inter-alia that “the currency notes issued by the Bank shall be legal tender in Nigeria…for the payment of any amount.”

Furthermore, the Act stipulates that any person(s) who contravenes this provision is guilty of an offence and shall be liable on conviction to a prescribed fine or six months imprisonment.

To the International Monetary Fund (IMF), dollarisation can pose important challenges to policymakers. It also constrains the capacity of monetary authorities to act as a lender of last resort; hampers banks’ liquidity management; and weakens the stability of the financial sector, as it may amplify the impact of exchange rate movements on banks’ balance sheets, thereby increasing the risk of contractionary effects and bank failures.

“A better understanding of dollarisation in Africa may thus help to assess potential vulnerabilities and the case for the implementation of policies in order to mitigate the risks that may result from it,” the fund added.

The CBN Governor, Mr. Godwin Emefiele had declared that the currency for transacting business in the country remains the naira and had warned that it is illegal to carry out transactions using the US dollar.

He had said: “We will be looking at areas where people are making demands for foreign currency; people who are landlords who are asking for rent in dollars; schools that are asking for school fees in dollars or transacting business in dollars.”

He stressed that it was illegal in Nigeria to transact business in foreign currency and advised those involved in the practice to desist from doing so, because the CBN would soon come after them.

Beyond the dollarisation of the economy, experts have stressed the need for the country to increase its productivity and change consumption patterns to shore up the value of naira. This was among the consensus reached by experts at a one-day roundtable on national issues at a recent forum organised in Abuja.

To the convener and member of THISDAY Editorial Board, Dr. Okey Ikechukwu, the CBN had made several policy interventions to improve the value of the national currency, including via the Anchor Borrowers Programme, which was created and enhance farmers’ access to loans.

“This initiative alone has created millions of jobs, taken many youths off the crime path and rescued many local economies. Only economy-reflating and socially impactful efforts, as seen in such initiatives, in addition to consuming what we produce and producing what we consume, will give us the prospect of bringing up the value of the National Currency and keeping it up,” he said.

Clearly, for Nigeria whose currency is not convertible or serve as international currency, she must earn foreign exchange through high productivity and export of goods and services, receipt of monetary gifts or receipt of foreign loans and investments in order to import needed goods and services aimed at the development of the economy and enhancing the welfare of the citizens.

Indeed, high levels of forex earnings and external reserves are the backbone of the naira exchange rate. They ensure stability of the rate while low levels weaken the naira. But then, it must be noted that the CBN does not produce forex; it is what is earned by the country that the Bank strives to manage and use to stabilise the exchange rate.

To Prof. Mike Obadan, the CBN has strived to carry out its mandate by using supply and demand management strategies, particularly, forex conservation and control measures as well as measures to ensure adequate supply of foreign exchange.  This is particularly so because forex is a scarce resource that needs to be efficiently managed if the country is to achieve macroeconomic stability, and avoid chronic balance of payments and external reserve problems.

The Professor of Economics and Chairman, Goldmark Education Academy, noted that for some time now, there have been issues about forex in the country, which predates the present administration, stating that over the years, genuine efforts of the federal government to achieve a headway on these have tended to be undermined by exogenous shocks in the past five years which pushed the economy into recession in 2016 and 2020.

According to Obadan, the first recession from the first quarter (Q1) of 2017, was triggered by the collapse of crude oil prices in the global market. The price of Nigeria’s Bonny Light crude oil then declined continuously from $62.22 in Q2 2015 to $34.39 per barrel in Q1 2016.

Owing to this, as at the second quarter, 2017, when the country exited recession, crude oil price per barrel stood at just $50.21 per barrel.

“Due to the heavy dependence of the Nigerian economy on the oil sector, the impact of the oil market crash was severe on export earnings, foreign exchange reserves, government revenue and other macroeconomic aggregates including economic growth

“External reserves declined from $28.28.33 billion in Q2, 2015 to $23.8 in Q3, 2016. The other external sector indicators similarly deteriorated: balance of goods and services, balance of current account, financial account, overall balance of payments, and external debt stock and debt servicing.

“The net forex inflow became negative, implying that the country paid out more forex to the rest of the world for importation of goods and services than it received. This implied that the demand for forex was higher than receipt of forex and the pressure on forex and the naira exchange rate was very high. This accounted for the devaluation/depreciation of the naira in relation to the US dollar at that time.

“Secondly, the Covid-19 pandemic-induced economic crisis in 2020 resulted in recession in the third and fourth quarters of last year. The pandemic containment measures in the form of economic lockdowns and restrictions on international travels and business resulted in recessions for countries in various degrees.”

The former Director-General, National Centre for Economic Management & Administration, Ibadan, however, pointed out that the parallel market rate is determined mostly by speculators and rent seekers in a shallow and illegal market, which he argued constitutes a very tiny proportion of the forex market in Nigeria.

“Because the quantity of forex available in that market is very small in relation to the demand of the desperate economic agents that want to buy forex at any cost, the exchange rate is necessarily high. It cannot serve as reference for the naira exchange rate.

“If it is so, then it is the case of the tail wagging the dog! The parallel forex market needs to be avoided by decent economic agents. It will continue to exist as long as the naira is not convertible, the productivity of the economy remains low and the country does not earn enough forex from export of goods and services and capital inflows,” Obadan stressed.

Therefore, in order to stabilise the forex market and reduce the pressure on the naira exchange rate, Obadan said there was the strong need to move away from the country’s flawed pattern of economic management of the past.

He therefore called for a revival and rebuilding of the productive sectors of the economy to achieve higher capacity utilisation and productivity, and competitive manufactured exports; strong government encouragement of local refining of petroleum products for both domestic consumption and exports; as well as strong and effective surveillance of the forex market by the monetary authority to check round-tripping of forex from the deposit money banks to the parallel market.

In addition, Obadan advised the government to ensure that during oil booms, it saves forex and build fiscal buffers; increases sourcing of local raw materials and revival of the capital goods industry; promote fiscal and monetary discipline and harmony; create an enabling environment for productive capital inflows, especially foreign direct investment; and actively promote restoration of confidence in the economy to check capital flight.

“A good handle on the current insecurity challenges along with macroeconomic stability will be very helpful in this regard; rationalise imports structure to manage demand for forex; as may be permitted by supply considerations, use external reserves stock to support the exchange rate through increased funding of the foreign exchange market; and use moral suasion to encourage Nigerians to patronise home-made goods and reduce their high propensity for disruptive trade and commerce,” he added.

Former Deputy Governor of the CBN, Prof. Kingsley Moghalu, had stressed the importance of export diversification. Moghalu pointed out that there was need for the country to have education, industrial and trade policies that are in alignment to support the growth of the economy.

He also said there was need to focus on productive knowledge in Nigeria, saying many people go through schools, but only a few have the kind of skills that can drive an industrially powered economy.

Therefore, while taking steps to put an end to the seeming dollarisation of the economy, improving the country’s forex earnings and stabilising the exchange rate require developed domestic production structures, a diversified economy and export orientation that is supported by an effective trade policy as well as a conducive macroeconomic environment.