Dollar or Naira? Dollarization of Nigerian Economy
There have been expressions of concern in the increasing use of the U.S. dollar in the Nigerian economy. In fact, so much so that it was the subject of a resolution in the House of Representatives, which passed a motion, moved by Mr Nadu Karibo (PDP, Bayelsa State), asking the Central Bank of Nigeria to ban use of the dollar and other foreign currencies in local transactions.
Fears that the dollar could soon displace the naira as the "dominant" medium of exchange in Nigeria may be exaggerated, and illustrate the divide in economic status of Nigerians. It is estimated that despite the large volume of dollars circulating in Nigeria, less than 0.1% of Nigerians (one in every one thousand) have ever had cause to use the dollar in any transaction. Despite this statistic an increasing number of hotels, schools, and suppliers of luxury items prefer to quote their prices in U.S. dollars.
But the fact that prices are quoted in dollars may not necessarily mean the customer is obliged to pay in that currency. Businesses are increasingly quote prices in dollar as a means of gauging fluctuations in the value
of the naira. Whether it is in the national interest that such businesses should now be forced to quote naira prices and then alter them on a daily or weekly basis is debatable. Quoting prices in anything other than local currency is a sign of distrust of the economy and should be discouraged as a matter of national pride. However the practice should not necessarily impact on the exchange rate since payment does not require purchase of dollars.
The CBN response to the House motion was to say that the apex bank it could not impose such a ban because it had no capacity to do because it was not a law enforcement agency.
The CBN's deputy governor in charge of its operations, Mr Tunde Lemo, instead tried to link the increasing robustness of the dollar to the failure to introduce higher denomination of the naira, citing the botched N5,000 naira note.
But Lemo misses the point when he said that higher naira denominations would reduce demand for dollars. He was evidently mistaking the passion of treasury looters to carry large sums of money in foreign currency with any real use for the dollar in the economy. These dollars are not used in any business transactions but are simply a means of holding bulk cash. One hundred dollar note is valued at more than fifteen thousand naira. Consequently even with the N5,000 note, moving the naira around would be three times as bulky. The only way to reduce the demand for dollar as a "holding currency" is through the pursuit of the "cashless economy" where any payment above a certain amount is only paid through bank authorization.
It is not contestable that, whenever anyone in Nigeria is expected to actually pay in dollars, it should never be for a service rendered locally. Hotels and other service providers that charge foreigners in dollars or any European currency should be asked to stop the practice, which only hampers the local tourism industry. One of the attractions of a tourist destination is the relative exchange rate. Most tourists compare hotel prices and other facilities according to the exchange rate and go where they can get the best value for money. With all the other obstacles to overcome in the drive to encourage tourism, the last thing the country needs is to be considered as too expensive. By charging so-called "international service rates", Nigerian hotels only discourage international visitors.
The CBN should be consistent in its campaigns of promoting the naira. The campaigns are currently being executed sporadically and are not having the desired impact. The CBN assertion that it cannot enforce any law to stop the practice of charging in dollars is surprising, given its previous demand that the Sovereign Wealth fund must be designated in naira, not dollars, because it was the law.
