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 26, 2015 at 12:45 am   /   by   /   comments (0)

Two months ago, the Central Bank of Nigeria (CBN) reminded all banks of the consequences of the rising trend of currency substitution and dollarisation of the economy. The CBN, had in a circular issued by its Banking Supervision Department, warned all banks to desist from collecting and using dollars for transactions. It reiterated that the Naira currency remained the only legal tender in the country. The apex bank reminded the banks that Section 15 of the CBN Act 2007 provided that the unit of currency in Nigeria shall be the Naira. The circular said, “Section 20 (1) of the same Act provides that the currency notes issued by the Bank shall be legal tender in Nigeria, at their face value, for the payment of any amount. “Section 20 (5) further provides that a person who refuses to accept the Naira as a means of payment is guilty of an offence and liable on conviction to a fine or six months imprisonment”. 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.

CBN may lose its monetary policy independence

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.

Cyril Mpaka, former member of the budget team in Cross River State, says: “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, he 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”, he added.

In his opinion, Henry Boyo, an economist, said abundant natural endowments will not save the economy of any nation if there is always surplus cash or excess liquidity in the system as inflation will spiral to make the local currency eventually worthless, such that, patriotism notwithstanding, everyone will sensibly seek to conserve their income or wealth in any other currency or instrument that is perceived to be relatively more secure and stable.

His words: “For example, the unyielding naira depreciation from stronger than N1=$1 to the current rate of N200=$1 has led to preference for dollar holdings. Consequently, more commercial transactions are now concluded in dollars, thus enthroning the “phenomenon of currency substitution and partial dollarisation in the economy,” a development which the MPC communiqué decries and sadly recognises to “have also significantly fuelled the unusually high demand for forex.”

He added that the threat of dollarisation has been decried by all former CBN governors, particularly, since the return to civil rule in 1999, stressing that curiously, Nigerians preferred to hold the naira when the exchange rate was much stronger than the dollar. Incidentally, the naira was widely accepted internationally, and some commercial outlets which enjoyed huge Nigerian patronage in London and elsewhere actually priced their products in naira.


Enhancing strategies

He reiterated that in order to reverse the increasing present flight from the naira, the committee enjoined the CBN “to continue to fine-tune demand management measures as well as implement appropriate supply enhancing strategies to ensure effective demand and utilisation of foreign exchange in the country.”

The Monetary Policy Committee (MPC), according to him, believes that the run on the naira is the result of excessive demand for the dollar because of reduced dollar supply. The committee is probably right, but the question that clearly begs for an answer is where do all the seemingly boundless supply of naira comes from to buy up all the dollars offered for sale every time? Surely, the more the supply of available naira values against centrally rationed dollar supplies, the weaker will be the naira, and such depreciation will further induce public adoption of other safer currencies as a store of value for their income.

Human right lawyer, Femi Falana, SAN, in an address which delivered recently at the Life Theological Seminary, Ikorodu, Lagos State criticized the increasing dollarization of the Nigerian economy by the management of the Central Bank of Nigeria.

“In pointing out the illegality of turning the United States Dollar into the official medium of exchange in Nigeria I did say inter alia: “Under Section 16 of the Central Bank Act, 2007 the power to fix and determine the exchange rate of the Naira is exclusively vested in the central bank. But the CBN has abdicated that statutory duty to the so called market forces.

“For instance, the Monetary Committee of the CBN fixed devalued the national currency in November last year by fixing the exchange rate at N168 to a dollar. But market forces have increased the exchange rate to over N220 to a dollar while the International Monetary Fund is insisting that the Naira be further devalued. In justifying the reckless devaluation of the Naira last November, Mr. Godwin Emefiele, the Governor of the Central Bank of Nigeria blamed it on the falling price of oil in the international market”, he stated.

He added that some institutions charge tuition fees in dollars. “On a daily basis, traders are allowed to buy millions of dollars to pay for all manners of goods including toothpicks imported from China, United Arab Emirates, Turkey etc. No doubt, the pressure on the dollar has recently increased due to unprecedented demand from politicians in preparations for the 2015 General Election. Hundreds of millions of dollars were bought from the forex market to purchase votes during the congresses and primaries of political parties.

“A particular candidate has been linked with the distribution of dollars to traditional leaders and other influential groups in the country in a desperate bid to win the presidential election. In a bid to dollarize the economy and destroys the Nigerian economy the CBN supplies millions of dollars to the foreign exchange market on a weekly basis. Although Nigeria has become the largest importer of the United States dollars in the world neither the International Monetary Fund (IMF) nor the World Bank has ever questioned the reckless devaluation of the economy. Even, the National Assembly which is debating the 2015 Appropriation Bill has not deemed it to consider the deleterious effects of the increasing devaluation of the national currency on the implementation of the Budget.

“Since by virtue of section 16 of the Central Bank Act, 2007 the currency notes and coins issued by the central bank shall be legal tender in Nigeria at their face value for the payment of any amount it is illegal to dollarize the economy in any manner whatsoever. Indeed, under section 20 (5) of the Act any person who refuses to accept the Naira as a means of payment for any amount in Nigeria is guilty of an offense and liable to be prosecuted and if found guilty shall be fined N50,000 or 6 months imprisonment. In Chief Gani Fawehinmi v. President, Federal Republic of Nigeria (2007) 14 NWLR (Pt 1054) 275 the plaintiff challenged the policy of In the Olusegun Obasanjo Administration of paying dollar salaries and allowances to Dr. Mrs. Ngozi Okonjo-Iweala and Ambassador Olu Adeniji, the ministers of Finance and Foreign Affairs respectively.

The federal high court struck out the case for want of locus standi on the part of the plaintiff. But the Court of Appeal disagreed with the lower court. In upholding the locus standi of the appellant to maintain the action the Court held the payment of salaries of any public officer in dollars was contrary to the provisions of the Certain Political, Public and Judicial Office Holders (Salaries and Allowances etc) Act No 6 of 2002.

“In declaring such payment illegal and unconstitutional the Court directed both ministers to refund to the Federal Government the money paid to them in excess of the salaries and allowances approved by law. Based on the decision of the Court of Appeal and the relevant provisions of the Central Bank Act the management of the CBN should stop the further dollarization of the economy.”

“In his reaction to the aforesaid observations the CBN Governor, Mr. Emefiele addressed a press conference at Abuja wherein he belatedly advised schools, landlords and other business enterprises against demanding foreign currencies for the settlement of transactions carried out within the country. Curiously, the Governor was silent on the weekly sale of millions of dollars to politicians.

“He however reiterated that the official currency of the country remained the naira and that the CBN would “in due course” come after those who are involved in the illegal practice. By condoning the grave violations of the provisions of the CBN Act since November last year, the management of the Bank had deliberately sanctioned the illegality and thereby contributed to the deterioration of the value of the national currency. With respect, Mr. Emefiele should not be allowed to play on the intelligence of the Nigerian people.

“The law does not expect the CBN Management to embark on issuing cautionary statements but to ensure the arrest and prosecution of the people involved in the criminal enterprise of dollarizing the economy. If the CBN is not prepared to discharge its duty by stopping the further dollarization of the economy we shall not hesitate to pray the Federal High Court to order the prosecution of the management of the Bank for criminal negligence in the circumstance”, he added.

Politicians are guilty Dollarisation of Economy

Speaking on the issue Deputy Speaker of the Lagos State House of Assembly, Taiwo Kolawole admitted that politicians are guilty when it comes spending the dollar over Nigerian legal tender, which is the naira.

Kolawole also denied ever indulging in such act, saying “it is very wrong because it is killing the economy of Nigeria. It amounts to assisting the economy of another country.

“Let me give you an instance, the value of your currency depends on the transaction you are making with other currency, and you know we measure world currency in dollar. If you are fond of changing your money in dollars every time, then the demand for dollars will continue to rise and when there is rise in the demand for dollars, there is bound to be rise in exchange rate.

“Therefore, it is always good to limit the request for dollars. Particularly, those of us that trade in mono-product and when you trade in mono-product, it is only that product that gives you foreign currency. If you have a balanced trade, then you don’t have a problem; you wouldn’t have any deficit and there is bound to be improvement on the quality of your currency.

“But if your trade is not balanced or it is negative towards you, it shows that you will need to pay more to balance your trade. That is why you must always ensure that your demand must always evens the supply and the supply depends on what you get from outside. We have only one source of getting the supply which is the sale of oil,” he said.

Kolawole, who noted that every Nigerian has contributed to what is happening in the country for now, said “everybody has contributed to the deficit unknowingly. Before, people wear anything dresses; we have our textile companies producing clothes for us here in Nigeria but now, even cleaner relies on okrika. Okrika also contribute to the deficit because they go out to buy in dollars.

“And to make matters worst, instead of us to use our currency locally, we still use dollars. I’m surprised when I see people use naira to buy dollars to spend in Nigeria.

“There was a time I was talking about corruption in Nigeria and I said corruption is in two ways. There are some people that steal the money and still keep the money here in Nigeria. But some will steal our naira and still compound our woes by changing the nairas to dollars, then take it abroad to keep and in that case, it becomes a double punishment for Nigerians.

“I heard of a story of an American Governor that took kickback and he was running for a second term in office. And you know their system, they investigated him and people were against him and criticising him and it got to a stage that his party had to succumb to faith that they were going to lose the election.

“But the man chose to address the people and he told that it was true that he took the kickback and that if he had rejected it, the money would have been taken to Washington. He said he took the kickback and didn’t take it home but that he used it to establish business and people are working there. If they had taken the money to Washington, it won’t be of benefit to them. And at the end of the day, they voted for him and he won the election. Later people realised that he used the kickback positively to better the lives of his people.

“But here in Nigeria, people will steal the money that they don’t need and they will take it to other countries and they money will better the economy of those countries. And when you do these things, they have effect on our economy; it makes our economy bad.

“Why would anyone want to spend dollars in Nigeria? It is against the constitution of the country and it is against the rules of the Central Bank of Nigeria. I granted an interview recently and I said General Muhammadu Buhari cannot fight corruption alone, fighting corruption is a collective effort. Imagine, there is a fund raising and Buhari and Ministers are invited and Buhari stood up to say he is donating N50,000, it will be mad of any Minister to say he is donating N1 million.

“I will not deny the fact that politicians are the big spenders when it comes to dollars but for me, I don’t engage in spending dollars. We heard that when the president came to Lagos before the election, it was reported that he was doling out dollars and in mopping up, they are killing the naira.

“Most of our people that go to Dubai to trade, they spend dollars because they don’t accept naira in Dubai and this will surely make the demand for dollars to be high and when the demand is high, there is every tendency for the price of the dollar to rise,” said the lawmaker.

In addressing this issue, Kolawole advised the CBN to be alive to its responsibilities by ensuring that laws and policies guiding the monetary issue are implemented to the latter. According to him, “if the CBN can implement its laws and policies, I believe people will begin to have respect for our own legal tender.”