Stopping dollarisation of the economy

IT is common knowledge that some economic agents in the country would prefer to denominate their goods and services in foreign currency, particularly the dollar. For instance, some providers of high-cost flats in highbrow parts of the country engage in this practice. It is even it is rumoured that at some schools, fees are indicated in dollars.

During the recent elections, a story was peddled regarding how dollars became the preferred currency of exchange because of its portability, which informs its use for the perpetration of money laundering. But it does not take any special legal knowledge to guess that this attitude offends the legal tender status of the Naira, which makes it the only authorized means of exchange in the country. And the regulatory authority had decried and complained incessantly regarding this practice.

One recalls that the current Governor of the Central Bank of Nigeria (CBN), at his maiden press conference, cautioned all to desist from the act, as it was no longer acceptable. Following the recent pressure which the exchange rate of the Naira had experienced, the Monetary Policy Committee, again, raised an alarm that part of the dollar demand pressure being experienced in the economy came from compatriots who would undertake their transactions by doing currency substitution using the dollar, reminding all concerned of the extant law prohibiting the practice with the penalty pertaining thereto highlighted.

The Corporate Communications Department of the CBN, not long after the MPC alert, soon followed suit with a reminder circular in which it explained that the law is without prejudice to foreigners who are to use their credit/debit cards for payment or exchange of foreign currency at any of the authorized dealers’ outlets in the country. Since then there have been some reactions, one of which was by one Nduka Ikeyi, in a back page guest post published by the BusinessDay of Tuesday April 14, 2015 which raised issues regarding the fact that the monetary authorities had since allowed the use of dollars in the economy under specified conditions, including the fact that payment in foreign exchange for services and products provided by one Nigerian company to another could be allowed for as long as the settlement of such transactions would be done using independent domiciliary accounts.

He also argued that the law should not be operated to take away the rights of parties to contracts in the choice of a foreign currency as medium of obligation, not payment. The payer should be allowed the option to settle his contractual obligations from his own foreign exchange sources, such as in situations whereby companies in the oil business proceed to undertake payment of salaries to consultants in foreign exchange. It is also certain that this requirement does not take away the right of hotel proprietors to indicate room rates in foreign currency for their many visitors from overseas.

But it should be clear to all concerned that these are not the people this law is after even if one might be inclined to wonder why anyone would prefer to go into an agreement to make payments in any currency in Nigeria other than the Naira, which is the legal tender.

But what has really prompted this contribution, was the Editorial by The Guardian of Thursday, April 16, 2015 with the above caption, in which as usual, the paper proceeded to rehash its now well-known bias against the way and manner by which the foreign exchange inflow into the country is monetized in Naira which is then allocated to the different tiers of government, blaming this procedure for all the ills that have assailed the economy, including of course, the present problem of attempts to perpetrate currency substitution, ultimately resulting in the trend whereby the dollar is now becoming the preferred medium of exchange.

The Editorial invites the incoming administration of President Buhari to tackle the Central Bank’s management of the nation’s monetary policy. In summary, it is clear that the grouse of The Guardian is encapsulated in this statement: “The Monetary Policy Committee should note the fact that the management of the domestic currency together with its numerous plagues afflicting the economy springs from an initial wholesale currency substitution which gave rise to high inflation, constant depreciation and periodic devaluation thereby eroding the quality of the Naira as a dependable store of value. And that this initial currency substitution is on-going and has been in place since 1971 and it evolves illegal printing of Naira for deficit financing.”

What The Guardian has failed to include here is its usual recommendation that foreign exchange inflow should be allocated by issuing dollar-denominated certificates which is a clear case of dollarization of the economy which is now being decried, and most certainly, criminalized.

Henry Boyo, a key proponent of the recommendation to allocate foreign exchange inflow to the Federation Account to other tiers of government through the issuance of dollar-denominated certificate, also in his article titled: “Buhari and the economy: Which way forward?” published by The Guardian of April 20, 2015, recommended to the incoming administration to interrogate why the Naira exchange rate remained weak against rational expectation even when the balance on the reserves were at some point in time in excess of 60 billion dollars. He, therefore, proceeded to proffer the usual rationalization that the systematic surplus Naira is primarily caused by the CBN’s creation of fresh Naira values for monthly distributable dollar revenue. He argued that in most successful economies, Monetary Policy Rates are kept below three per cent as against the current 13 per cent prevalent in the country and that surplus cash in the system is mopped up at the rate of below two per cent instead of the current rates which are above 10 per cent.

But, we have in the past specifically taken issues with most of these observations. It takes Economics 101 to appreciate the fact that you cannot for instance, have deposit rates that are below the rate of inflation otherwise economic agents would per force be paying an inflation tax, thereby suffer discouragement to patronize bank deposit facilities. Therefore, you cannot have an inflation target which is high single digit rate and still logically and rationally be talking of interest rates of the order being herein canvassed.

What is even worrisome is that despite the persistence of this prescription from the Boyo school of Economics centered around the allocation of funds accruing to the Federation Account by issuing dollar-denominated certificates, no one has bothered to cite one example of a jurisdiction where this recommended method is the preferred approach. Rather what is obvious from the relevant literature is that the method, which the country has so far adopted, is best practice.

Compatriots have been put on notice to desist from an attempt to adopt the dollar as the preferred currency of transaction in clear offence of the existing law of the land which makes the Naira the legal tender currency, and only do so in the clear danger of bearing the full consequences of the law and the expectation is that all concerned will fall in line in compliance with this directive.
•Dr. Chizea lives in Lagos.