Two weeks ago while in Tokyo at the conclusion of the 2012 IMF/World Bank Group Annual meetings, the CBN Governor, Sanusi Lamido Sanusi, decried the dollarisation of the Nigerian economy. He said the President, the CBN and everybody is worried about the development. 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 economic analysis, there are two common indicators of dollarisation. The first one is the share of foreign currency deposits in the domestic banking system in the broad money, including foreign currency deposits which the CBN Governor is in good position to know, but has not disclosed. The second measure is the share of all foreign currency deposits held by domestic residents at home and abroad in their total monetary assets.
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.From records in economic history, the biggest economies to have officially been dollarised as of June 2002 are Panama (since 1904), Ecuador (since 2000), and El Salvador (since 2001). As of August 2005, the United States dollar, the Euro, the New Zealand dollar, the Swiss franc, the Indian rupee, and the Australian dollar were the only currencies used by other countries for official dollarisation. In addition, the Armenian dram, Turkish lira, the Israeli shekel, and the Russian ruble are used by internationally unrecognised but de facto independent states.
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.
Looking at the Nigerian economy, who is to be blamed for the dollarisation of the economy – government policies, CBN or the ordinary Nigerian?