…Naira comes under fresh pressure

There are indications that the Central Bank of Nigeria, CBN, may be forced to renew its anti-dollarization measures to protect the local currency from further depreciation.

A source in the apex bank told Vanguard MoneyDigest that the monetary authorities were worried over extensive deployment of United States Dollars in the political field amidst the primary elections of the leading political parties in the run-up to the general elections early next year.

The concern of the apex bank, according to the source, was heightened last weekend when the fortunes of the Naira nose-dived in the official foreign exchange market after a similar development earlier last week in the parallel market.

The parallel market traded USDollar at N610 earlier in the week before it moderated to N607 which was still significantly higher than previous week’s level of N603 and last month’s average of N595.

Last weekend the Naira depreciated against the dollar at the official market of Investors and Exporters window exchanging at N419.75 to the dollar, a 0.06 per cent depreciation, compared to N419.50 to the dollar on Thursday.

An exchange rate of N444.00 to the dollar was the highest rate recorded within the day’s trading before it settled at N419.75.

These were coming at the backdrop of further pressure on the external reserves which fell 0.3% week-on-week to $38.5billion.

Analysts at Afrinvest, a Lagos based investment house, said this week they expect Naira to hover around the current rate, barring any significant shock in the market.

Apparently, in anticipation that such major shock would be underway in the near term closer to the main elections, the apex bank is said to be looking at its measures similar to what it did in 2015 around the same issue of dollarization of the economy across all segments of the soceity.

In the new circular dated May, 21, 2015, issued by the director for banking supervision, on the same subject of currency substitution and dollars satin of Nigerian economy, the CBN reiterated that the pricing of goods and services in Nigeria shall continue to be in Naira only, and that it is a criminal offence to refuse Naira as a legal tender for payment in exchange of goods and services in Nigeria.

 The CBN however provided a list of revenue-generating government agencies as well as businesses permitted to conduct business payments/receipts in foreign currency. According to the new circular, these agencies and operators include: the Federal Inland Revenue Service, the Nigerian Ports Authority, Nigeria Maritime Administration and Safety Agency, the Federal Airport Authority of Nigeria, the Nigeria Airspace Management Agency, the Nigeria Shippers Council, Operators in Oil and Gas – including Oil service companies, Operators in Maritime and Aviation Industries, Licensed operators in Export Processing and Free Trade Zones. I

In addition, the CBN circular stated that holders of domiciliary accounts are allowed to make payments to and from their accounts according to existing regulations, but emphasized that CBN foreign exchange intervention funds and funds obtained from the interbank foreign exchange market are not permissible for deposit into domiciliary accounts.

In Economic parlance, dollarisation of an economy occurs when the inhabitants of a country use foreign currency in parallel to or instead of the domestic currency as a store of value, unit of account, and/or medium of exchange within the domestic economy.

This is exactly what is happening in the country today. Nearly every government functionary, from the presidency to governors, ministers, CBN officials and top business managers, spend dollars in Nigeria unhindered as if it has become a legal tender.

Nigeria as a country has not officially adopted the dollar as a legal tender, but, unofficially, it is used as a means of exchange in the payment for goods and services. The term dollarisation does not only apply to usage of the United States dollar, but generally to the use of any foreign currency as the national currency.

In Nigeria today, many residents store their value in dollars, liquid assets are moved freely around with the dollar as preferred currency. Those who offer bribe use the dollar.

In the last two weeks, several Nigerians were caught at the airport with high volume of the dollar in their possession.

The incidence of the use of dollar in Nigeria arose from the adoption of the Structural Adjustment Programme (SAP) when the CBN officially encouraged the opening of domiciliary account, allow hotels to charge and accept dollars from foreigners. That was when Nigeria was in dire need of foreign exchange to foot the cost of accumulated foreign trade bills.

This was followed by the high inflation rates which decreased the demand for naira and raised the demand for alternative assets, including foreign currency and assets dominated in dollars. This phenomenon called the “flight from domestic money” resulted in a rapid and sizable process of dollarisation of the Nigerian economy.

As it is in most countries with high inflation rates, the naira is gradually being displaced by a more stable currency, the dollar. The store-of-value function of the naira as legal tender in Nigeria is being replaced by the dollar. If this goes on unchecked, the unit-of-account function of the naira will be displaced as many prices are being quoted in the local market in dollars.

The prolonged period of high inflation in the country has caused the domestic currency to lose its function as a medium of exchange as many Nigerians now carry out many transactions in foreign currencies.

The flight from naira is because financial services regulators have not done their jobs properly to provide Nigerians sufficient financial instrument with which to hedge. An economy with a well-developed financial market can offer a set of alternative financial instruments denominated in domestic currency, reducing the role of foreign currency as an inflation hedge.

Continued dollarisation of the Nigerian economy will lead to the loss of seigniorage revenue, the loss of monetary policy autonomy, and the loss of the exchange rate instruments. Seigniorage revenues are the profits generated when monetary authorities issue currency.

Continued dollarisation of the economy will result to the nation losing the right to its autonomous monetary and exchange rate policies, even in times of financial emergency. In a highly dollarised economy, devaluation policy is less effective in changing the real exchange rate because of significant pass-through effects to domestic prices.

As the party primaries draws to a close tomorrow political observers had noted that news from the various states of the federation are replete with vote-buying and capture of delegates with the use of the United States of America dollars. The naira wept.

An aid to one of the Senators from the South-South state was quoted as saying, ‘‘It was a dollar rain in Abuja that had never been seen before. To the discerning, it was obvious that the politicians (probably in connivance with dishonest bankers) had mopped up enough dollars preparatory to the party primaries.’’

Meanwhile, the serious-minded industrialists, manufacturers and genuine businessmen were going through the harrowing torture of buying dollars in the black market consequentially causing a sharp increase in the prices of manufactured and imported products that affect the everyday man.