Currency reforms way out of dollarisation of economy

It is no longer news that Nigeria’s currency, Naira, has continued to depreciate against the dollar due to increased demand for the greenback, despite various measures put in place by the Central Bank of Nigeria (CBN) to address this.

Apart from rising demand for dollars to meet legitimate needs by the end users, dollars are now being used for rent payment in parts of the country, including bribing delegates at party primaries, and paying for visas, among others.

Such practices undermine efforts of the CBN to save the Naira. As on Monday, naira exchanged with the dollar at the rate of N608/$ at the unofficial market popularly called black market.

The CBN in April 17, 2015, stated in a circular that it was aware of the rising trend of currency substitution and dollarization of the economy in recent times. The CBN condemned the development and reiterated that the Naira currency remains the only legal tender in Nigeria.

“Please be reminded that Section 15 of the CBN Act 2007 provides that the unit of currency in Nigeria shall be the Naira. 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 and 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 6 months imprisonment,” the CBN said in a circular to all banks.

The CBN warned that it was illegal to price or denominate the cost of any product or service (Visible or Invisible) in any foreign currency in Nigeria and no business offer or acceptance should be consummated in Nigeria in any currency other than the Naira.

Consequently, deposit money banks operating in Nigeria are advised to desist from the collection of foreign currencies for payment of domestic transactions on behalf of their customers and the use of their customers’ domiciliary accounts for making payments for visible and invisible transactions (fees, charges, licenses and so on) originating and consummated in Nigeria.

“This however is without prejudice to foreigners, visitors and tourists who are encouraged to use their cards for payments or exchange their foreign currency for local currency at any of the authorized dealers’ outposts including hotels. Appropriate sanctions shall be meted on any bank that breaches this regulation. Please note that this circular supersedes the provisions of Memorandum 16 of the Central Bank of Nigeria Foreign Exchange Manual and Paragraph (XI) Section 4.2.1 of the Monetary, Credit, Foreign Trade and Exchange Policy Guidelines for Fiscal Years 2014/2015,” the CBN said in a circular.

Read also: Osinbajo, ex-CBN governor, others extol Olashore’s virtues

Despite the CBN’s warning, in some parts of Nigeria’s highbrow areas, land and luxurious apartments are being sold in dollars with naira equivalent. For instance a Luxury two bedroom flat at Eko Atlantic City, Lagos, is being sold at $700,000, which is approximately N308,321,560, according to Blackacre Realtors Limited.

Also, some Embassies operating in Nigeria accept dollars for the payment of Visa. For instance, one of the travellers who planned to travel to Egypt last week said, “you come with $100, that is dollars not naira for submission and $5 for the purchase of form. All in dollar denominated.”

Russian President Vladimir Putin said had signed a decree saying foreign buyers must pay in roubles for Russian gas from April 1, and contracts would be halted if these payments were not made.

“In order to purchase Russian natural gas, they must open rouble accounts in Russian banks. It is from these accounts that payments will be made for gas delivered starting from tomorrow,” Putin said in televised remarks, according to Reuters.

Muda Yusuf, chief executive officer, Centre for the Promotion of Private Enterprise (CPPE), said, “People are using dollars as a means of transaction rather than using naira.”

He described it as a transfer of value, adding that money has a very important quality and that it must be able to serve as a store of value. “If you keep money in a fixed deposit and the value is going down every day, you are losing value and that currency will not serve the true purpose of being a currency.”

The second reason he mentioned was that it must be portable. There is an issue with the profitability of money, adding that some people prefer to store their money in gold or property.

Yusuf noted that what is happening in the financial sector now is real negative interest rate as inflation rate is higher than deposit rate.

He admitted that one of the reasons for dollarization is corruption, which is mainly done in cash. However, to correct the problem, he said there is a need to ensure that the currency can be a good store of value by reducing inflation. It is inflation that leads to loss of value of the currency. So, he said there is a need to ensure a moderation of inflation to preserve the value of the currency.

The second measure he said was currency reform, saying it is high time the country began to have the highest denomination of currency. “how can we have a country where its highest currency denomination is equivalent to $2. There needs to be a reform of the currency. We need to convert some naira notes to coins,” he said.

Other serious countries like Russia ensure that the only recognized means of exchange is their local currency to prevent racketeering.

In Nigeria many manufacturers and other businesses do not have access to foreign exchange to run their operations; while racketeers appear to have unlimited access in negation of several CBN policies.

The apex bank has introduced various measures to curb the naira pressures and increase the inflow of foreign exchange, the latest being the RT200.

After the Bankers’ Committee meeting of February 10, 2022, Godwin Emefiele, governor of the CBN personally unveiled the RT200 FX Program, which is an initiative of the Bankers’ Committee aimed at raising US$200 billion in non-oil export earnings over the next 3-5 years.

He specifically stated that the program will be anchored on five pillars, namely: Value-Adding Exports Facility, Non-Oil Commodities Expansion Facility, Non-Oil FX Rebate Scheme, Dedicated Non-Oil Export Terminal, Biannual Non-Oil Export Summit.

“In order to avoid these sudden adjustments to our economic life, we need to focus on strategies that can help us earn more stable and sustainable inflows of foreign exchange. We would need to follow the best practices of other countries and ensure that we protect ourselves a little bit from factors that are beyond our immediate control,” he said.

According to him, the Central Bank of Nigeria has been confronted with rising demand for foreign exchange for both goods, services, and other needs. With this unabating demand, he noted that the CBN has been working to manage both the demand and supply side to meet foreign exchange obligations.

The World Bank last week in a new report advised the Nigerian government through the Central Bank of Nigeria (CBN) to allow further adjustment of the naira at the official window, to reduce the persistent foreign exchange pressure in the country.

Allowing further gradual adjustment in the Investors and Exporters Foreign Exchange (IEFX) rate, where the CBN manages the price, would help eliminate misalignment and alleviate persistent FX pressures,” the World Bank said in the report titled ‘Nigeria Development Update’, which was released on Tuesday last week.

The CBN took steps to unify multiple exchange rates by adopting the IEFX window rate as its official exchange rate in May 2021. However, different windows still exist, and the parallel rate premium continues to climb, reaching 39 percent over the official IEFX rate in March 2022 .

The CBN continues to supply FX to at least four windows, sometimes at varying rates. The four windows include the I&E window, the secondary market intervention sales retail window, the small and medium-size enterprises (SME) window, and the window for invisibles.

Get real time updates directly on you device, subscribe now.