There are indications that the CBN is planning to renew its forex containment measures before the 2023 elections to protect the local currency from further devaluation as the apex bank redefines its strategy to align with its policy in 2015 around of the same problem of dollarization of the economy in all strata of society.
Put simply, the dollarization of an economy occurs when the citizens of the country use foreign currencies alongside or instead of the national currency as a store of value, unit of account and/or medium of exchange within the national economy.
Recall that in a circular dated May 21, 2015, issued by the director of banking supervision, on the same subject of currency substitution and the satin dollar of the Nigerian economy, the CBN reiterated that the pricing of goods and services in Nigeria will continue to be in Naira only, and that refusing Naira as legal tender for payment in exchange for goods and services in Nigeria is a criminal offence.
The CBN at the time, however, provided a list of revenue-generating government agencies as well as companies authorized to make foreign currency business payments/receipts. According to the new circular, these agencies and operators include: Federal Inland Revenue Service, Nigerian Ports Authority, Nigeria Maritime Administration and Safety Agency, Federal Airport Authority of Nigeria, Nigeria Airspace Management Agency, Nigeria Shippers Council, Operators Oil and Gas – including oil service companies, operators in the maritime and aviation industries, licensed operators in export processing zones and free zones.
In addition, the CBN circular stated that domiciled account holders were permitted to make payments to and from their accounts in accordance with applicable regulations, but pointed out that CBN foreign exchange intervention funds and funds obtained on the interbank foreign exchange market could not be deposited in domiciliary accounts.
Nigeria as a country has not officially adopted the dollar as legal tender but, unofficially, it is used as a medium of exchange for payment for goods and services. The term dollarization does not only apply to the use of the United States dollar, but generally to the use of any foreign currency as the national currency.
On the efforts of the Central Bank of Nigeria, a member of the CBN’s Monetary Policy Committee, Professor Mike Obadan, said that the CBN has ensured that it carries out its mandate by employing money management strategies. supply and demand, in particular forex custody and control. measures as well as measures to ensure an adequate supply of foreign currency. This is especially true because forex is a scarce resource that must be managed efficiently if the country is to achieve macroeconomic stability and avoid chronic balance of payments and external reserve problems.
Obadan noted that for some time now there have been forex issues in the country, which predate the current administration, stating that over the years the genuine efforts of the federal government to advance these issues have tended to be undermined by exogenous shocks. over the past five years, which pushed the economy into recession in 2016 and 2020.
According to Obadan, the first recession in the first quarter (Q1) of 2017 was triggered by the collapse of crude oil prices in the global market. The price of Nigerian bonny light crude oil then fell steadily from $62.22 in the second quarter of 2015 to $34.39 per barrel in the first quarter of 2016.
For this reason, in the second quarter of 2017, when the country emerged from recession, the price of crude oil per barrel stood at just $50.21 per barrel.
“Due to the heavy reliance of the Nigerian economy on the oil sector, the impact of the oil crash has been severe on export earnings, foreign exchange reserves, government revenue and other aggregates. macroeconomics, including economic growth.
“External reserves went from 28.28.33 billion dollars in the second quarter of 2015 to 23.8 billion dollars in the third quarter of 2016. The other indicators of the external sector also deteriorated: balance of goods and services, balance of current account, financial account, overall balance of payments and external debt. stock and debt service.
“The net inflow of foreign exchange turned negative, implying that the country paid more foreign exchange to the rest of the world for the import of goods and services than it received. This implied that the demand for currency was greater than the receipt of currency and the pressure on currency and the Naira exchange rate was very high, which explained the devaluation/depreciation of the Naira against the US Dollar at that time.
“Second, the economic crisis induced by the Covid-19 pandemic in 2020 led to a recession in the third and fourth quarters of last year. Pandemic containment measures in the form of economic lockdowns and travel restrictions and international business have caused recessions for countries to varying degrees.”
However, Obadan, who is also an economist, pointed out that the parallel market rate is determined mainly by speculators and rent seekers in a shallow and illegal market, which he says constitutes a very small proportion of the foreign exchange market. in Nigeria.
“Because the amount of forex available in this market is very small compared to the demand from desperate economic agents who want to buy forex at all costs, the exchange rate is necessarily high. It cannot be used as a reference for the Naira exchange rate.
“If so, then so is the tail wagging the dog!” The parallel foreign exchange market should be avoided by decent economic agents. It will continue to exist as long as the naira is not convertible, the productivity of the economy remains low and the country does not earn enough foreign exchange through the export of goods and services and capital inflows,” Obadan pointed out.
Therefore, in order to stabilize the foreign exchange market and reduce the pressure on the Naira exchange rate, Obadan said there is a strong need to move away from the flawed economic management model of the past.
He therefore called for a revival and reconstruction of the productive sectors of the economy to achieve higher capacity utilization and productivity and competitive manufactured exports; strong government encouragement of local refining of petroleum products for domestic consumption and exports; as well as strong and effective surveillance of the foreign exchange market by the monetary authority to control the round trips of currencies from the deposit banks to the parallel market.
Regarding solutions, Obadan advised the government to ensure that during oil booms, it saves forex and creates fiscal reserves; increases the supply of local raw materials and the revival of the capital goods industry; promote fiscal and monetary discipline and harmony; create an environment conducive to productive capital inflows, especially foreign direct investment; and actively promote the restoration of confidence in the economy to control capital flight.
“A good understanding of the current challenges of insecurity as well as macroeconomic stability will be very useful in this regard; rationalize the structure of imports to manage foreign exchange demand; to the extent that supply considerations permit, use the stock of external reserves to support the exchange rate by increasing foreign exchange market financing; and use moral suasion to encourage Nigerians to patronize homemade products and reduce their high propensity for disruptive trade and commerce,” he added.
As the foreign exchange cleanup ahead of the 2023 elections continues, the Central Bank of Nigeria has pledged to prosecute anyone found transacting business in the country with foreign currency as payment, as part of the fulfillment of its regulatory mandate.
The provisions of the CBN Act 2007 state, among other things, that “notes issued by the Bank shall be legal tender in Nigeria…for the payment of any amount”.
For example, the CBN Act states that anyone who violates this provision is guilty of an offense and liable, on conviction, to a prescribed fine or six months’ imprisonment.
CBN Governor Mr. Godwin Emefiele had noted that the currency for conducting business transactions in the country remained the Naira and warned that it was illegal to conduct transactions using the US Dollar.
He said, “We will look at areas where people are applying for foreign currency; landlords who charge rent in dollars; schools that charge tuition in dollars or do business in dollars.
He pointed out that it was illegal in Nigeria to transact in foreign currency and advised those involved in the practice to refrain from doing so as the CBN would soon come after them.
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