Dollarisation and Effects on the Economy

The forex crisis in the economy is gradually reaching a crescendo with its ripple effects on various sectors of the economy. Dollarisation which is one of the fallouts of the crisis, is capable of worsening the situation. if the Central Bank of Nigeria does not stand firmly against it.  Kunle Aderinokun writes

Whereas the Central Bank of Nigeria (CBN) Act of 2007 stipulates that the naira is the only legal tender in Nigeria, there is an absurdity that’s fast becoming the norm in the mould of dollarisation of the economy.

Dollarisation is the utilisation of dollars by individuals and institutions alongside the naira in the economy to value transactions and for the purchase of goods and services. The unregulated use of the dollar in the Nigerian economy has increased the demand for it and has been the albatross of the naira. Besides, the intense pressure from importers of 43 items barred from accessing dollars from the official market but who were getting their demands satisfied through the parallel markets and other alternative sources, also contributed to the misfortune of the naira. 

The dwindled fortunes of the naira have encouraged and led currency traders and users to have the utmost faith in the dollar, relying on it as the veritable store of value, especially in recent times, when the value of the national currency has been a free-fall and has depreciated significantly against the dollar. 

That’s why it is not a surprise that property values, rental fees, school fees and hotel rates, amongst others, are priced and paid for in dollar and even employees of some companies have their salaries paid in dollars.   

For a country with depleted foreign reserves, the naira has been under heavy pressure for a while, culminating in the United States dollar exchanging for N1,040 last weekend at the unofficial market.  The erstwhile administration of President Muhammadu Buhari had operated a foreign exchange regime, whereby the apex bank directed the rates    

While the current administration led by President Bola Tinubu, in its wisdom, has applied measures to arrest the falling streak of the naira value, it has not had the desirable effect. Rather than pulling the naira up, it has only made the national currency to continue to experience an unfettered fall, which caused the government to halt the policy. Nevertheless, as part of its first major policy decisions, the CBN Governor, Olayemi Cardoso, has reversed its policy to now allow the importers to secure dollars directly through its window, giving a ray of hope for the naira.

This apex bank’s latest decision, which was contained in a statement issued last Thursday, noted that “Importers of all the 43 items previously restricted by the 2015 Circular referenced TED/FEM/FPC/GEN/01/010 and its addendums are now allowed to purchase foreign exchange in the Nigerian Foreign Exchange Market.”

The CBN promised to continue to promote orderliness and professional conduct by all participants in the Nigerian Foreign Exchange Market with a view to ensuring “market forces determine exchange rates on a Willing Buyer – Willing Seller principle.”

At the receiving end of the perennial adverse FX developments are the Nigerians, who are the teeming consumers of goods and services. As a result of the prevailing high dollar rate, the purchasing power of the naira has significantly dropped, putting consumers in a long spell of hellish situation, with prices of goods and services hitting the roof. 

Knowing the illegality of dollarisation and what such anomaly means to the economy and the people, human rights activist and senior lawyer, Mr. Femi Falana, recently dragged the CBN to court over the dollarisation of the economy.

The Senior Advocate of Nigeria (SAN), in the suit marked: FHC/L/CS/476/23, asked the Federal High Court in Lagos, to determine amongst others “Whether by virtue of Section 16 of the CBN Act, the exchange rate of the naira shall be determined, from time to time, by a suitable mechanism devised by the bank for that purpose?

Falana claimed  that ‘the seeming non-performance of the defendant’s statutory obligations culminated in dollarisation of the country’s economy, which has in turn affected the country’s economy negatively contrary to the objectives of the defendant as enshrined in Section 2 of CBN Act.’

While Falana is the plaintiff in the suit dated March 16, the CBN is the sole defendant. In a 10-paragraph affidavit in support of the Originating Summons deposed to by one Mr. Ayodele Aribisala, the plaintiff averred that the defendant had allowed many landlords in Lagos, Abuja, Port Harcourt and other cities in the country for which the defendant was established to serve to collect rents in dollars.  He added that: “The defendant has refused to stop the collection of school fees and rents in dollars in Nigeria.”

According to Falana, the dollarisation of the Nigerian economy and the failure to address the multiple exchange rates further pushed the naira to its current fluctuating state.

While recalling that in 2015, one dollar was exchanged for N178, but in 2022 it was exchanged for N750, Falana claimed that the multiple exchange rate regime led to the emergence of different exchange rates in the three major segments of the foreign exchange market namely: the official market, the Investors and Exporters window (also known as NAFEX) and the parallel market.

“That the failure of the defendant to perform its statutory duties has resulted in the constant devaluation, depreciation and unending plunge of the naira.

“That the resultant effect of the abdication of defendant’s statutory duties has also affected the country’s economy and many businesses adversely,” he averred.

Financial and economic analysts have expressed their opinions on the impacts of dollarisation on the economy.

A renowned economist and Chief Consultant, B. Adedipe & Co., Dr Biodun Adedipe, posited that dollarisation of the economy is not only counterproductive but also counterintuitive. 

According to him, the naira is Nigeria’s legal tender and that means commodities traded in the country should be priced in naira. But now, there is a growing list of assets, products and services in Nigeria priced in the United States dollars.

Adedipe believes there should be a firm official position taken to discourage this and government should design and announce sanctions for organisations, entities and individuals that engage in such. “Once there is evidence (and this should not be difficult to obtain, as some such entities even openly advertise their products), sanctions should follow. As well, there are several Nigerian government agencies that charge their fees and levies in USD. This is an aberration and a paradigm that celebrates a foreign currency- the US dollar! What this does is to inadvertently give a persistent push to the demand for USD, when the productive and sustainable framework should be how to strengthen the naira by pushing the demand for it and reducing the demand for USD,” he stated. 

According to him, it takes deep courage and presidential declaration to do this because the elites and the politicians are the ones mostly guilty of this.

To Prof. Uche Uwaleke of the Banking and Finance Department, Nasarawa State University and President Capital Market Academics of Nigeria,  the dollarisation of the economy has adverse consequences for the domestic economy as it helps to worsen the demand pressure in the forex market.

Charting the way forward, the professor advised the government to collaborate with the CBN to tackle inflation as the CBN alone cannot tame inflation given the current supply-side factors driving inflation, especially rising energy costs.

According to him, the CBN Act of 2007 recognises the naira as the only legal tender in Nigeria. By implication, spending dollars in Nigeria is illegal. As such, he added, the government should put in place measures to ensure foreign and local entities in Nigeria charging fees or pricing their products in foreign currency are sanctioned.

Also, in his view, CEO, The CFG Advisory Ltd, Dr.  Adetilewa Adebajo, who pointed out that the main problem in the economy today is stagflation, said with runaway inflation real yields and real rates are negative.  He, therefore, added that in order to retain value astute investors seek the greenback to purchase assets that will retain value. 

“This is best demonstrated by the balance of banks in Nigeria. As a result of the revaluation of their dollar loan books with the devaluation if the naira with a move to single window, all banks are reporting bumper revenues and profits with increase in their asset size,” Adebajo claimed.