20 February 2013

Nigeria: Controlling the Dollarisation of Nigeria's Economy

Disturbed by the rising demand for the United States dollar and other foreign currencies for domestic transactions, the House of Representatives last week urged the Central Bank of Nigeria (CBN) to put an end to this development. Obinna Chima writes on the implication of such legislation on the economy

The growing demand for foreign currencies in domestic transactions has continued to be a source of concern to many Nigerians.

Although the naira has relatively been stable in the last 18 months due to the restrictive monetary policy adopted by the Central Bank of Nigeria (CBN), some lawmakers have argued that a situation where almost every arm of government, policy makers and others in the society spend foreign currencies, would continue to suffocate the local currency and make it weak, compared to other currencies.

Thus, the House of Representatives last week passed a resolution urging the CBN to put an end to the dollarisation of the economy.

Dollarisation takes place in an economy when people living in the country use foreign currencies in parallel to or in place of the domestic currency as a store of value or means of exchange within the economy. But the term is applied generally to the use of any foreign currency in a domestic economy.

However, while some financial market analysts welcomed what they termed the high level of patriotism displayed by the lawmakers, they insisted that due to globalisation and the Nigeria's quest for economic transformation, which has led to significant growth in the flow of international trade, it would be difficult to control the use of foreign currencies for some form of transactions in Nigeria.

The CBN Governor, Mallam Sanusi Lamido Sanusi, had at the last International Monetary Fund/World Bank annual meetings in Tokyo, expressed concern over the dollarisation of the Nigeria's economy. In fact, he said, this was part of the reasons why the apex bank proposed a N5, 000 banknote last year, which due out of public pressure, was suspended.

Findings showed that foreign exchange controls were often instituted by countries whose currencies are weak and whose citizens prefer to hold and use the currencies of other nations.

Resolution by the House of Reps

The motion in the House was presented by Hon. Nadu Karibo from Bayelsa State. Karibo had argued that the dollar was fast displacing the naira as a means of exchange in Nigeria.

He said major hotels, elite schools and supermarkets now preferred to be paid in dollars rather than accept the naira.

He further argued that the trend of using foreign currencies instead of the local currency for the payment of domestic transactions was weakening the naira and should be stopped before the local currency becomes worthless.

"There's a growing trend in the use of some foreign currencies, especially the US dollar, for the payment of school fees, hotel bills, real estate, rents and purchase in bars, nightclubs, luxury goods shops in Nigeria.

"Every country has its currency, which serves as a means of exchange, a symbol of identity, a source of pride and a sign of fiscal independence and economic stability.

"Without equivocation, the naira is Nigeria's currency and the only means of exchange for local and domestic transactions known to the law in Nigeria," he had argued.

Unarguably, a strong currency gives residents greater purchasing power, and makes foreign products relatively cheaper. Also, volatile exchange rates create uncertainty about international transactions, adding a risk premium to the costs of goods and assets traded across borders. By stabilising the currency, a government can encourage greater trade and investment.

How Feasible is the Policy?

The Regional Head of Research, Africa, Standard Chartered Bank, Razia Khan, who welcomed the decision by the lawmakers, informed THISDAY that Zambia also did same thing and the country's currency appreciated.

"It is usually done when countries' forex rates are under pressure and may not be a bad thing to have in place to monitor flows more easily. Zambia has put in place measures to reverse widespread dollarisation in its economy, triggering a sharp appreciation of the Zambian kwacha (ZMK).

"In May, the Bank of Zambia (BoZ) introduced a new law, stipulating that only currency issued by the BoZ would serve as legal tender for domestic transactions, whether public or private. Following further clarification of the new regulations, the ZMK has been subject to a late, ex-post rally," she explained.

But Managing Director/Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane, described the proposal of the lawmakers as "a joke."

Rewane added: "Money is a store of value and you cannot compel people not to use whatever currency they want to use. That is not possible."

Also, the President, Finance Houses Association of Nigeria (FHAN), Mr. Samuel Durojaye, pointed out the resolution showed that the lawmakers were concerned about the need to strengthen the naira. He however stressed that the use of dollar or other foreign currencies was not something that can be legislated on.

Durojaye explained: "It is a good move, but it is not something that should be legislated on. Ordinarily, if the economy is doing well and we have a very strong industrial base, the naira will be strong compared to the dollar or other foreign currencies and people will prefer to hold the naira more.

"But today, people feel safe to hold dollars, pounds, euro as a store of value. People feel that these foreign currencies are better store of value against the naira. Most of the goods in the country are imported because our economy is weak and these transactions are done in foreign currencies.

"So when these importers collect dollars or other foreign currencies, they know that whenever they want to import goods, it is any of these foreign currencies that will be used. But if they collect naira, whenever they want to import their goods, they will have to convert the local currency to the foreign currency."

Durojaye urged the CBN and Ministry of Finance to initiate policies that would reinvigorate ailing industries and strengthen the country's production base.

On his part, the Head of Research, Sterling Capital Limited, Mr. Sewa Wusu, agreed that there had been a phenomenon where local transactions were done in foreign currencies, adding that what the lawmakers were saying was that, that was not supposed to be the case because the naira is our local currency.

"But if we say we want to make Nigeria a Free Trade Zone, then there should be no barrier in the usage of currency. If they want to make the naira strong, they must make laws that will make the nation a producing economy. If the country becomes a producing economy, the naira will be strong.

"As long as we are a net importer, there will always be pressure on the naira. So we must diversify the economy, create conducive environment for businesses to thrive, encourage entrepreneurs and the real sector, and see what becomes of the naira. If you open up an economy, you don't ban the use of foreign currencies," Wusu declared.

Similarly, while a Senior Analyst at BGL Securities Limited, Mr. Femi Ademola, observed that some hotels and international institutions in the country demand payments in dollar, he opined that, the move by the lawmakers would end in futility.

However, Head of Investment Research at Meristem Securities Limited, Mr. Taiwo Yusuf, welcomed the resolution by the House, saying that it would bring about a reduction in the demand for forex at the CBN's regulated Wholesale Dutch Auction System (WDAS) as well as strengthen the naira.

The sub-Saharan Africa's Economist at Renaissance Capital, Yvonne Mhango, had blamed the perennial weakness suffered by the naira on Nigeria's heavy import dependence.

"The country's high import dependence explains why the exchange rate is often the bellwether for Nigeria's economic health, and why there is a swift pass-through of exchange rate movements to inflation. About a third of Nigeria's forex outflows are due to invisibles, which refers to services. These include international payments for services as well as movement of money for which there is no contra transaction, such as transfer payments.

"Nigeria's large oil and gas industry largely explains the country's substantial payments to service providers," she said.

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