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By Amechi Ogbonna
In July of 2015 after the swearing in of President Muhammadu Buhari as Nigeria’s leader, the Central Bank of Nigeria introduced a policy of capital controls to limit the amount of foreign currency that Nigerians can spend per day for transactions locally and internationally.
Part of the reasons for the policy was to curb unnecessary waste of the nation’s scarce foreign exchange, particularly for good and services that have local alternatives. A fallout of that policy was the closure of the official foreign currency window to 41 finished goods and raw materials considered to have viable local alternatives by the apex bank.
According to the CBN, the said 41 items were not banned from entering the country, but rather Nigerians desiring to import them would have to independently source the required foreign exchange to do so.
Despite a flurry of private sector vituperation against the Central Bank of Nigeria, that policy has survived the last 7 years even with more items added to it as the Federal Government sought avenues for resuscitation of the economy.
Some of the policy outcomes included the fact that local investment targeting to achieve the import substitution mandate of the government began to gain traction.
In the agricultural sector for instance, Nigeria rice imports from Thailand fell from 1.24 million tonnes in 2014, to 58,260 tonnes in 2016, representing a 91 per cent decline.
Industry sources say that the reduction in Nigeria’s rice importation bill was further facilitated with the successful implementation of the Anchor Borrowers’ Scheme of the Central Bank of Nigeria (CBN), that has funded millions of smallholder rice farmers across states of the country.
The rice initiative gained a huge boost in part through President Muhammadu Buhari New Year broadcast in 2018 in which he charged the CBN to ban importation of rice by not allow even one kobo from official foreign currency window to go into such a project.
According to Buhari, “Great nations are built by enterprising people who turn their hands to anything that circumstances dictate.” To intensify local production, Nigeria Incentive-Based Risk Sharing System for Agriculture (NIRSAL) is deploying innovative nation-wide field structure to support 225,000 farmers under the CBN Anchor Borrowers Scheme.”
However, while the government and CBN may have scored some points in the agricultural and backward integration space, one monstrous development currently threatening the integrity of Nigeria’s legal tender today is the ongoing dollarisation of the economy.
In the Nigerian economy, dollarisation is a trend that occurs when citizens and the business community use foreign currency (US dollar) alongside their own domestic currency, the Naira in the transactions.
Since the 1980s, the U.S dollar has increasingly been usurping the legal role of the naira as the medium of exchange within the Nigerian markets for foreign exchange, savings and commodities. I
A situation where the U.S dollars and other foreign convertible currencies encroach in the domestic market where the naira ought to dominate as the legal tender, it comes to what many call the dollarisation theorem.
However, dollarisation is not only applicable to the use of the United States dollar, but also to the use of any other country’s foreign currency as an accepted means of exchange. Nigeria like many emerging countries has already embraced dollarisation to some extent due to the volatility of the purchasing power of the domestic currency. This can be blamed on apparent loss of naira’s external value and its appeal as a store of value.
The Central Bank of Nigeria (CBN) in an attempt to stave off pressure on the Naira had drawn public’s attention to its Currency Substitution and dollarisation of the Nigerian Currency Circular issued on day April 17, 2015.
The Circular leveraged existing legislative provisions to reiterate the ban against denomination and pricing of local (visible and invisible) transactions in any foreign currency other than the naira. The CBN further reiterated that it is illegal and an offence to price or denominate the cost of any product or service in the country (visible or invisible) in any other foreign currency, warning that no business offer or acceptance (with the exception of businesses in the oil and gas industry, maritime, aviation, operators in the free trade zone and selected government agencies) should be consummated in Nigeria in any currency other than the Naira.
Meanwhile, some economists have listed the negative sides of dollarisation to include, a loss of monetary autonomy, seigniorage and a vital national symbol including a greater vulnerability to foreign influence.
Reliable information at Daily Sun’s disposal indicate that in some parts of the country, the USD is becoming the legal tender and currency of exchange for rents payment, airline ticketing, hotel bills and groceries payment among others.
Daily Sun learnt that even at recent political campaigns ahead the 2023 presidential elections, dollar and not the naira was the currency of exchange used to swing the allegiance of delegates that voted to pick presidential candidates of the two leading political parties.
It is rather ironic that while visitors to United Kingdom, France, Germany and Indonesia or Dubai are compelled to exchange dollars in their possession to the local currencies of their host countries before making transactions, Nigerians would rather offer their visitors the option of paying in hard currencies, thereby degrading the integrity of the Naira which is our legal tender.
This is further demonstrated in the way the citizens handle the local currency.
Today for instance, the sacredness with which Nigerians handle the dollar or pound sterling is such that they cannot be squeezed as against the disrespect of rumpling and defacing the naira by stuffing it in compartment that often render them usable.
It can be argued that Nigerians preference for other foreign currencies and their disdain for naira is partly responsible for its consistent value erosion and a reason why the CBN’s campaign on the need to promote the naira as the nation’s legal tender has not yielded much results.
In their reactions, economists and stakeholders described the development as worrisome and called for urgent government policy to stem the trend.
Dollarisation of the economy…
Chairman, Manufacturers Association of Nigeria (MAN), Apapa branch, Frank Onyebu said it is totally wrong to use the dollar or any other foreign currency for payment of goods and services within the country. I have been to several countries and I know it is never the norm to replace the local currency with a foreign one.
One is usually required to change to the local currency; acceptance of foreign currencies is usually done under the table. I know that there is a risk to these things.
But what do you have in Nigeria? Goods and services are advertised in foreign currencies! Buildings in highbrow areas are priced in dollars. Some hotels advertise rates in dollars as well. We are all used to people spraying dollars during parties! All these are done openly under the watch of the Nigerian government.
The implication of this is that people have lost faith in the Naira. This should never be allowed to happen. We need to build faith in our currency, not destroy it. No wonder the Naira keeps depreciating against foreign currencies.
There should be a law prohibiting use of foreign currencies for purchase of goods and services within the country. This is one of the ways we can salvage the value of the Naira. I expect that such a law already exists but is just not being implemented.
Also reacting, the chief executive officer of The Centre for the Promotion of Private Enterprises (CPPE), Dr Muda Yusuf said
The first thing to acknowledge is that the currency is losing value and when this happens, people lose confidence in the currency. In economics, there is what is called the quality of good money. It is the ability to serve as a store of value. When a currency is failing as a store of value, people will move to another currency to store their value. So, the rapid degeneration of our currency as a store of value is contributing to the so called dollarisation of our economy.
The second point is that when one has transactions that are highly cash driven or wants to deliver cash either legitimately or illegitimately, one naturally wants something that is portable or handy because of the value of the currency. Just like N1 million is a lot of cash in terms of volume, one would prefer to go for dollars that is less bulky. The currency is no more potable by virtue of the fact that it has lost value.
Another quality of good money is portability. The naira is becoming non-potable, so when people need a portable currency, they convert to dollars. Corruption is another factor. Corruption is always done in cash, its not done online because of being traced. Just like the delegates were bribed with dollars to reduce the bulkiness of the naira. Those involved in corruption use cash that is potable. Corruption thrives in cash. Dollar is portable and preferable that is why they use it.
What can govt do
To ensure we preserve our currency and give value to it, government should see what it can do to reduce inflation.
Government needs to carry out a currency reform. Our economy is over due for N5,000 note or even N10,000 note. The highest denomination now is N1,000 note which is equivalent to just $2, so when you have an economy where your highest denomination is equivalent to $2, then you know you have a problem.
In USA the highest denomination is $100, so even if we have the #5,000 note its less than $10. We need to reform our currency and introduce those high denomination notes, so that the cash you have can be potable and not bulky.
The economics of currency management demands that higher currency notes be introduced and convert the lower notes like #200 #100 to coins. This will also reduce the cost of currency printing because the amount used to print the #100 #2000 and other lower notes is far higher than the value of notes.
If you ask me, I will say paying in dollars here is good for us as it brings in the FOREX we want here.
They ask for bills in dollars because the value of the currency is low and because of the volatility of the currency. The exchange rate is fluctuating and because the dollar is relatively stable. As business people, no one wants to lose money.
The whole thing comes back to how dependable and stable the currency is.
All these are symptoms of a problem. The issues are inflation, value of the currency, volatility of the exchange rate, they need to be addressed.
Another point is that CBN financing of government’s deficit is contributing to the weakness of the naira and to the rate at which it is losing value. The rate at which the CBN is also printing money and pumping a lot of money into the economy, through its ways and means is highly inflationary. The more CBN finances government’s operations, the more the currency gets weakened. Some of the reports I have read show that its about N19 trillion outstanding.
Also speaking, the Chief Executive Officer, brij, Ehi Binitie, said that Africa has the same problem regarding availability of sufficient FX and this is the reason the continent needs to provide a much better mechanism for trade.
Some people prefer to store their money in gold or property and so what is happening in the financial sector is a real negative interest rate as inflation rate is higher than the deposit rate. One of the reasons for dollarisation is corruption and so the solution to this is ensuring that the FG, CBN come up with good policies in order to moderate inflation and also introduce some reforms. I think one of the major issues with the industry is how long it takes to settle a transaction beyond the payment experience and this is the question in every mind of business owners. Nigeria represents almost 50 per cent of intra-Africa trade and so when we do not have a “trust infrastructure”, then these challenges with payment gateways cannot be solved.
