De-dollarisation the Nigerian economy

This article is a follow-up to my opinion piece from last week, titled “The dollarisation of weak and underdeveloped economies.” Dollarisation is an official monetary policy decision by an underdeveloped and weak economy to use the United States dollar (USD) side by side with its local currency, or sometimes exclusively, because of the economic benefits derivable therefrom. It could also be an unofficial or informal preference for the USD as a means of payment for local transactions and as a store of value in an unstable exchange rate environment and in an inflationary and import-dependent economy, like Nigeria. Dollariration as an official monetary policy is more common in small economies with a weak or small export sector, or in which exports contribute very little to their gross domestic product (GDP) and whose GDP is invariably less than 50 billion USD.

Nigeria’s GDP has halved in the last ten years, from 510 billion USD in 2014 (after rebasing) to 253 billion USD in 2024, due to the foreign exchange crisis. Nigeria is historically an underdeveloped economy, which means that most sectors of the economy, including the social sector and infrastructure, have over time experienced a vicious cycle of underinvestment and underperformance due to poor economic policies and bad governance. This, combined with a weak export sector, an import-dependency syndrome, and an inflationary trend, has made Nigeria susceptible to unofficial dollarisation, despite our relatively medium-sized economy.

When the dollar is unofficially but overwhelmingly adopted as an alternative or preferred means of transaction, and store of value and leads to price and income indexation relative to the dollar exchange rate, it generates far-reaching economic and financial risks or consequences. It puts considerable pressure on the local currency, constraints monetary policy options, and leads to monetary policy firefighting. Local prices go through the roof due to mounting inflationary pressure, highly skilled labourers vote with their legs enmasse, seeking greener pastures abroad, and foreign investors close shop and relocate. On the whole, the economy experiences a downward spiral. This, in a nutshell, is an account of recent trends in the Nigerian economy.

Q: “This, combined with a weak export sector, an import-dependency syndrome, and an inflationary trend, has made Nigeria susceptible to unofficial dollarisation, despite our relatively medium-sized economy.”

What is the way out of the unintended dollarization trap of the Nigerian economy? First, better economic planning and policy coordination between monetary and fiscal authorities and between the federal and state governments, as well as between the public and private sectors. Secondly, there is a need for increased productivity and short-, medium-, and long-term measures to rejig and refire the economy. In the short term (less than a year), the Central Bank of Nigeria (CBN) should strictly prohibit the use of foreign currencies for all forms of local transactions, including payments of salaries, school fees, and visa fees, among others; requiring payments in the local currency for goods and services in the oil and gas sector produced and consumed locally; making it an offence to stockpile foreign currencies beyond a reasonable minimum threshold to be determined by CBN after due consideration; and local refining of the full range of petroleum products, including petrol, before the end of 2024 to save the 25 to 30 billion USD reportedly used to import petroleum products annually.

In the medium term (less than three years), pay critical attention to major oil and gas projects that are expected to be completed and commissioned in or before 2026 and that have the potential to earn billions of dollars for the Nigerian economy. These include the 5 billion USD Nigeria LNG Train 7, which was about 60 percent completed in the last quarter of 2023; the 200,000 barrels per day BUA petroleum refinery located in Akwa Ibom State; the brass methanol plant in Bayelsa State, expected to be commissioned this year with a capacity to produce 10, 000 tonnes of methanol; and Indorama Eleme Petrochemicals Limited’s 3 billion USD expansion project, expected to make Nigeria one of the largest petrochemical hubs in Africa, among other gas projects expected to come on stream in the short to medium term.

In the long term (three years and beyond), resolve all long-standing issues in the power sector through complete privatisation of all electricity assets still held by the Federal Government, including the 40 percent equity in all electricity distribution companies; and the Federal Government wholly-owned Transmission Company of Nigeria (TCN), recently unbundled by the Nigerian Electricity Regulatory Commission (NERC); and create the enabling environment for private sector investors to completely drive the revival of the power sector. Completely turn around and privatise the Ajaokuta steel plant. Finally, turn Nigeria into a major manufacturing hub to take full advantage of the African Continental Free Trade Agreement (AfCFTA) and adopt an export-led development strategy.

Thirdly, a change in our consumer behaviour in preference for locally produced goods is necessary and imperative for us to de-dollarize our mentality. We must also re-educate and re-orient ourselves to believe that imported goods do not necessarily equate to quality. A case in point is locally made electrical cables, which are superior to imported cables. The federal and state governments must lead by example in patronising locally produced goods and services in preference to imported goods.

It is clear from the foregoing that the unofficial or unintended dollarisation of the Nigerian economy has been the result of long-standing and persistent policy failures leading to the collapse of sectors of the economy, manifesting in stunted growth and continual collapse of the power sector, de-industrialisation and a drastic reduction in oil production and exports, thus constraining our export base and making Nigeria precariously import-dependent.

De-dollarisation The Nigerian economy is aligned with policies that will revamp our economy, make it efficient, productive, and competitive, emphasise in-country production, and incentivize export-oriented industries, while the government and people intentionally prioritise the patronage of local goods and services in preference to imported ones.