Dollarisation Of Economy: Implications And Benefits Of The Clampdown | Independent Newspapers Limited
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Dollarisation Of Economy: Implications And Benefits Of The Clampdown

Posted: May 28, 2015 at 12:06 am   /   by   /   comments (0)

The recent Central Bank of Nigeria (CBN) directives to all banks to desist from collecting and using dollars for transactions in the country as against the nation’s legal tender, the Naira, has continued to draw attention of Nigerians. They claimed that any attempt to relegate the Naira in favour of the Dollar or any other currency is a dangerous trend that must be condemned. In this special report, Andrew Airahuobhor, Oyeniran Apata, Bamidele Ogunwusi, Sola Alalabadan, Akinwunmi King, Nkasiobi Oluikpe, examine the implications and benefits of the clampdown on dollarisation of the economy and how far the banks and corporate Nigeria have complied with the directive.

Nigeria is a sovereign nation with official currency

Reacting to the development, Christian Wogu, an economic analyst, legal practitioner and President of Schekinah Business School, Victoria, noted that Nigeria is a sovereign nation with its own military, legislature, judiciary and government to mention but a few. Moreover, the Naira, he said, is Nigeria’s currency, hence, any attempt to sublime the Nigerian Naira to another, be it the Dollar or to any other currency, should not be viewed lightly.

Continuing, Wogu noted: “The recent press release by CBN is a law that is already in existence but being brought to the knowledge of the public. My view is that the law is good and exists to protect the Naira. Otherwise, Nigeria may inadvertently begin to lose its sovereignty if its currency becomes overshadowed by the Dollar. The CBN is discharging its primary responsibility of protecting the Nigerian Naira.

“My further view is that the purchase of Nigerian crude should be with the Naira. Thus, purchasers would have to exchange foreign currency into Naira before transacting in our crude. It thus follows that with numerous currencies of the world pursuing the Naira, its demand goes up as well as its value.  Accordingly, we advise CBN to enforce rigid compliance of the policy to ambush the dollarization of Nigeria.

In conclusion, he said: “As commendable as the strict application of the relevant Law and Regulations on the acceptable medium of exchange in Nigeria is, history has shown that a draconian foreign exchange control regime for a country with a very weak balance of payments and foreign exchange reserve situation, only promotes a clandestine foreign exchange market which further undermines such.”


Lack of trust for sustainability of the Naira

Another politico-economic analyst, and businessman, Christian Nwogwugwu also commented that though he is not too conversant with the CBN’s policy over the matter, that the Dollarisation of the Nigerian economy, in his own opinion, is most unfortunate.

In a layman’s definition, Nwogwugwu remarked that the Dollarisation of Nigerian economy, would mean a policy whereby the use of foreign currency, in this case the USA dollars for financial transaction, locally in place of our naira and kobo.

He also stated that this is as a consequence of lack of trust for the stability and sustainability of the value for our Nigerian currency. As usual, he noted that the proponents of this economic anomaly are myopic and are simply enemies of Nigeria’s economic development. They feign ignorance of the fact that foreign economic value are based on real economic indices which are derived from deliberate policies of a disciplined society, vis a vis their government.

Speaking further he said: “Not long ago, a Nigerian businessman said that it is always good to convert sales proceeds as soon as sales volume hits N1,000,000. The money is changed to dollar at any prevailing exchange rate. This according to him, is to prevent the value of sales from further crash before the next importation of stock because Nigeria currency is on the free fall.

“To an ordinary man on the street and the likes of the merchant man, his decision appears to be a wise decision.  But what are the implications of such economic game on the broader scale? Let’s leave that for the Okonjos’ of our economy.

“However, such economic ideas lead to mopping up of the naira which contributes directly or indirectly to inflation because not much local currency would be left at a particular time. Usually few quantities of money in circulation, drive the prices of goods and services up, Cetris-taribus!

“What dollarisaton of the economy would do is to subject Nigerian economy to perpetual over value, thus, hampering accurate statistics for economic analysis in this clime.”

Nwogwugwu indicated that strong economies of this world are products of committed productive and purposeful citizenry based on visionary economic policies determined to drive the economy to greater heights. The solution, he revealed, lies on productivity and diversification of the economy from mono product – petroleum to other areas such as agriculture and development of uncountable mineral deposits. Enough of this short cut called dollarization.

For Professor Aderanti Adepoju, member of the World Economic Forum and former Dean of the Faculty of Social Sciences (UNILAG), Nigerian currency is the naira and not dollar. You cannot go to the USA and do business with the naira. Therefore it is an aberration and assault on our own national currency to leave naira and do business in dollar, anybody doing that is contravening the law of the land.

Adepoju stressed that the exchange rate fluctuates and is very undependable, that is why some of these marketers are having issues with government. They said that if they import petrol and have to pay in dollars, by the time they go to the bank to exchange, the value would have changed. If you go to the internet, you will find out that even for those who are trading, every second, the value of the dollar changes.

Defending the directive of the CBN governor, Adepoju insisted that naira is the official currency of the country, as a result, we do not have any business dealing with neither dollar, Euros nor pound. He said that anybody who wants to do business abroad, will have to find the exchange rate available on that day to do business.

He added: “We don’t stand to benefit anything. Just like you find some of our Nigerian traders rushing to Dubai, China and Turkey to import merchandise, they are decreasing our national reserves because most of those transactions are done there in hard currency and not the naira. It is only in this country, that people use other peoples national currency as a medium of exchange. It is not done anywhere else. If you go to Britain and present the naira for transaction, you will be asked to go and exchange it and bring the pounds equivalent. That is how it is done all over the world.”


Hotels and Forex Marketers Game

From Oke-Koto in Agege, a suburb of Lagos, to other boisterous areas of the state including Apapa, Allen Avenue and Murtala Mohammed International Airport, Ikeja, it has been business as usual for the ubiquitous foreign exchange black marketers.

The situation is not different in Port Harcourt, the Rivers State capital, as the entrance to the famous Presidential Hotel is flocked by desperate and daring foreign exchange marketers. They offer irresistible exchange rates to their customers drawn from the banks, oil firms and government agencies.

The phenomenon is currently everywhere. However, market watchers are of the opinion that the demand for foreign exchange, especially the American Dollars, would continue unabated as long as some economic transactions in the country are done in foreign currencies.

Market watchers said apart from the activities of parallel marketers, the various bureaux de change licensed by the CBN have also been meeting the appetite of businessmen and politicians who have been compelled by the emerging dispensation to do transactions in dollars.

The grave consequences of allowing the dollarisation of our economy are as clear as all of us can see. From those countries practicing economic dollarisation, we can see that rather than promoting those countries’ fiscal and monetary discipline and macro-economic stability, it is the opposite that the dollarisation of their economies has caused them.

Akinola Juilius, a financial expert said: “We all know that by eroding the confidence Nigerians have for the naira, especially when the dollar becomes the best hedge against the naira, making inflation management difficult means the erosion of naira’s power as the country’s trusted store of value.

“As it plays out over time, to allow the dollarisation of our economy is to make the CBN lose its present monetary policy independence as well as lose control over exchange rate instruments. Not to allow the CBN to commit an effective counter-cyclical monetary policy means it cannot also stabilise the country’s business cycle whenever that happens, which also means that by losing its role as the lender of last resort to the banks since it cannot print the dollar, the CBN cannot provide liquidity assurance to the banking system.

“In fact, it is this inability to stabilise the country’s business cycle that makes the cost of using dollar in an economy increase exponentially. On the revenue side, the CBN will lose its right, the fees it charges banks for printing, storing, and distributing naira.” While acknowledging the fact that the dollarisation of the economy reduces the possibility of systemic liquidity shortage, analysts maintained that the fact that it also increases the domestic flight from local currency overrides such benefit.

“One of currency mismatches is the difficulty it presents in assets and liability on companies’ balance sheets. From all the high cost the dollarisation of our economy could pose to us, it is welcoming to see the recent opposition to allowing the country tolerate the dollar circulate alongside the naira”.


Pushing for Amendment of Foreign Exchange Act

As part of efforts to halt the seeming dollarisation of the Nigerian economy and also combat money laundering, the Central Bank of Nigeria (CBN) has concluded plans to push for an executive bill that will lead to the amendment of the Foreign Exchange Miscellaneous Act, 1995.

The move, Daily Independent was reliably informed by a high ranking central bank official, is one of the reforms for the foreign exchange market and is aimed at strengthening measures against the dollarisation of the domestic economy.

Specifically, the central bank aims to push for the amendment of Section 12(1) and 12(2) of the Act, which provide for the declaration of foreign currency at ports of entry or exit in the country.

While Section 12(1) of the Act stipulates that “no person shall be required to declare at the port of entry into Nigeria any foreign currency unless its value is in excess of US$5,000 or its equivalent”, Section 12(2) states that “foreign currency in excess of US $5,000 or its equivalent, whether being imported into or exported out of Nigeria, shall be declared on the prescribed form for reasons of statistics only”.

The central bank official explained that this is one of the key reforms in the foreign exchange market that the central bank would be pushing for through the amendment of the Act.

“As it stands, the Act permits persons to carry out any amount, even $1 million or $10 million in cash, insofar as it is declared in the Customs form. But this is not allowed anywhere in the world as it is a perfect conduit for money laundering.

“People can’t be carrying huge amounts of foreign currencies in and out of the country through our airports. Nigeria is one of the few countries where such is done and we must discourage that.

“We have the inbound and outbound money transfer channels and we are encouraging everyone, including foreigners, to take advantage of that,” he said.

The CBN last month also restated its resolve to prosecute anyone found transacting business in the country with any foreign currency as a medium of payment.

The banking sector regulator had frowned on what it described as the rising use of foreign currencies in the domestic economy as a medium of payment for goods and services by individuals and corporate citizens.

It stated that it had observed that some institutions priced their goods and services in foreign currencies and demand payments in foreign currencies rather than the domestic currency (the naira), which is the legal tender in Nigeria.

The CBN Act 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.

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

He said the CBN would in due course go after those who violate the policy.

The central bank official further expressed optimism that Nigeria’s foreign exchange reserves, which had been hovering around $29 billion in the last few weeks, would begin to grow by the beginning of the third quarter of the year. External reserves stood at $29.512 billion as at April 28.

The source explained that the slight appreciation in the price of crude oil in the international market has not translated to forex reserves accretion in recent weeks because Nigeria’s crude oil is sold based on forward contracts and as such the proceeds from the sales for the first three months of the year is what is just being received by the country.

“The money we are getting now is for crude oil sold in January, February and March, but hopefully by July, when the proceeds for crude oil sold April and May comes in, it would begin to impact on our external reserves,” he said.

However, the relative stability observed in the parallel market segment of the foreign exchange market since the conclusion of Nigeria’s general election appears to have fizzled out as the shortage of dollars has hit the bureau de change segment of the market.

Our findings showed that the naira traded between N220/$1 and N222/$ throughout last week. This represented a depreciation by about 12 per cent, compared with the N200/$1 that the currency appreciated to, immediately after the presidential election.

The development has once more widened the gap between the interbank and parallel markets.






Naira depreciation a significant drop in foreign exchange inflow

The President, Association of Bureau De Change of Nigeria (ABCON), Alhaji Aminu Gwadabe, blamed the depreciation of the naira in the parallel market on the significant drop in foreign exchange inflow into the country due to the drop in government’s revenue.

In addition, the ABCON boss also explained that recent foreign exchange policies by the CBN were affecting dollar supply to the market.

Ecobank Nigeria’s financial market analyst, Mr. Kunle Ezun, added that the pressure in the black market was as a result of huge currency demand from importers that do not have the necessary documentation to support legitimate purchases of dollars from the interbank market.

In a related development, Africa’s richest man, Aliko Dangote, in an interview with Bloomberg, has said that with the price of oil hovering at $60 per barrel is sufficient for the Nigerian economy to thrive.