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On restoring confidence in the naira

The Central Bank of Nigeria (CBN) has introduced a new currency policy that limits foreign currency transactions over domestic commercial bank’s counters.

Weeks ago, commercial banks in the country could allow up to $10,000 monthly cash deposit into customers’ domiciliary accounts. Now, this amount has been adjusted by the CBN to a maximum of $5,000 monthly.

This new restrictive policy, it is believed, should control the strong appetite for the dollar, which has been on a steady rise over time and restore confidence in the naira.

However, this currency control strategy does not affect electronic transactions by customers, gas companies, and dollar payments into government accounts.

Reports on foreign currency holdings by 10 top commercial banks in the country show that about 40% of total deposits in these banks are in dollars. This trend is expected to decline by this new decision from the apex banking authority.

Commenting on this recent development, Ngozi Adeleye, a financial economics expert lecturing at Covenant University, Ota, maintains a sceptical position about the effectiveness of the restrictive policy.

“Indeed, this policy by the CBN is expected to discourage the unwarranted holding of the dollar by a few individuals while leaving a vast majority who need this greenback for their daily business stranded,” she said.

However, expressing her cynical position maintains, “if preventing hoarding and reducing pressure on the dollar is the main aim of the CBN at this time, then supply-side policies that boost the supply of foreign exchange are what should matter”.

Basic economic theory of demand and supply exposes the effect of scarcity of resources on price. Therefore, an increase in the demand for the dollar relative to its supply will naturally push the price up, and an expectation of a future rise in prices will encourage hoarding by those who can afford to accumulate such resources.

Olamofe Olayemi, an analyst at ARM Securities Limited, believes that increased desire to hold and accumulate the dollar shows weak confidence in the local currency. “…this has to do with how much confidence the people have in the naira…” he said. Over time, we have seen significant depreciation in the naira.

“If you look at what happened in 2020, no one expected that the naira would be devalued twice in that year, and even the outlook, this year is suggesting further depreciation in the naira,” Olayemi laments.

“So, it makes sense to a lot of people to store their money in dollars. But, from the CBN standpoint, you agree with me that there is dollar scarcity.”

It is expected that fintech companies whose modus operandi involves substantial volumes of foreign exchange transactions will be negatively affected by this new development. This is possible because customers are now limited by how much they can fund their domiciliary accounts.

Electronic transactions are not much of a fairer alternative since their transaction charges are pretty high, and the documentation process to prove the legitimacy of heavy transfers are burdensome. This new currency restriction now seems like a chokehold on business owners and traders, and many question the novelty of the CBN’s policy choice at this time.

Peer-to-peer (P2P) transactions are also not an efficient alternative, especially for reasonably big deals involving large cash transfers.

Highlighting the potential impact of this spending limit action by the country’s monetary system, Ngozi Adeleye emphasises that financial inclusion is on the verge of a steep decline.

“If you mandate the public to deposit fewer dollars in the bank, then you leave them with much more at hand, which then circulates in the hidden economy”, she said.

Furthermore, she warns that “access to formal, bank-related services will be discouraged or highly limited in this wise, and the quantity of foreign exchange moving around outside the banking system will increase substantially. These unreported transactions will not be captured in the official books, unfortunately”.

Indeed, driving a cashless economy where many people are still unbanked and the electronic payment structures are still fragile is a tough call. In Nigeria, people still lack confidence in the e-payment system due to consistent failure and glitches in transactions, leading to irrecoverable monetary losses most times.

Restoring public confidence in the naira will require much more than imposing spending limits on the already scarce foreign exchange in the country. Dealing with the current inflation challenge in Nigeria is a crucial route to restoring balance in the market for goods and services while empowering households to consume and save more.

Allowing the foreign exchange market to be purely determined by market forces is another critical area the government may wish to explore if they hope to drive FX prices down appreciably and restore strength to the local currency.

Also, ensuring the availability and accessibility of foreign exchange through official channels is mandatory to ensure price competition between the available exchange rate windows. This price tug will usually ensure that local currency gains weight against the foreign currency, thus, boosting the value of the naira.

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