One of the greatest economists of all time, Richard Musgrave who along with his wife, Peggy gave Public Economics students and experts what has become the Bible of Public Economics.
In that book, Public Finance in Theory and Practice Noble Laurate expanded the frontiers of Public Finance.
He got the government directly involved with the function of Resource Allocation while mandating it to relentlessly pursue the goals of Redistributive Justice and Stabilisation of Macroeconomic Variables with such vigour that would stamp those tripod functions as the very essence of governance.
This is the modern theory of public finance. It gave the Keynesian theory a direction about deficit budgets, deficit financing through borrowing and comprehensive tax systems as well as in terms of the consequences of such fiscal actions.
Of these three statutory public policy duties of the state, the stability of the macroeconomy stands out as its fallout gets automatically transmitted to the other two, resource allocation and redistributive justice.
This explains why Monetary economics icons like Irving Fisher, Alfred Marchall, John Maynard Keynes, James Tobin and Milton Friedman had much earlier established the pillars of monetary policy for macroeconomic management.
So, fiscal matters and monetary issues should be reconciled for efficient management of the macroeconomy. They revolve around money management. They bother on the national currency as macroeconomic instability derives its potency from money (currency) mismanagement. Money matters are very serious and should be treated as such.
A national currency is the country’s legal tender. It is the medium of exchange, the store of value and the unit of Account of the country. No other currency has the capacity to perform these functions legitimately within the expressed national territorial boundaries.
Nigeria is a sovereign state and by virtue of the Act that granted it independence in 1960 and the republican constitution of 1963, the country has the power to choose its currency.
That power is vested in the Central Bank of Nigeria and cannot, under any circumstance be usurped by any other framework of governance. The Central Bank of Nigeria derived that power from the 1958 Act of Parliament and as amended in 1991, 1997,1998, 1999 and 2007.
It is thus, unambiguously stated that the business of currency and coinage resides solely and squarely with the apex bank of the land and implicit in those powers is the fact that the CBN supervises a mono-currency paper standard until such a time when the rest of the world redefines the global monetary standard.
It, therefore, becomes inconceivable that a country in this contemporary world would encourage ‘rivalry’ between its currency and those of other countries.
Such an act would constitute an economic crime that undermines the very existence of the nation as it bears strongly on the macroeconomic stability of the polity. This explains why countries are extremely cautious in exposing their currencies to the dangers of competition with another currency or adopting bi-currency standards. The experiences of Europe especially France and the United Kingdom with metallic money suffice here.
This was also captured by a piece which I published in my column in the Sun Newspaper in 2015 entitled Dolarisation of Naira Payments.
Between 2015 and today the Naira has undergone a preposterous transformation, far beyond what existed within the figments of my imagination. The Naira has been battered beyond a fraction of what gold did to silver under bimetallism in France.
The metallic money regime of the nineteenth and twentieth centuries produced two glaringly distinctive variants of legal tender; monometallism and bimetallism. These were the two options that Monetary Authorities had with gold and silver as the preferred metals for exchange and store of value although the less valuable ones like copper and bronze served as ‘token money’.
United Kingdom resisted the temptation of adopting bimetallism which would have seen gold and silver coins serve as legal tenders concurrently with intrinsic and face par values.
France could not and therefore reject monometalism in favour of bimetallism. Incidentally, the surge of silver inflow into France in the late 1840s and early 1850s threw punches on the French economy and in the process destroyed virtually its entire monetary system in 1853.
The Gresham’s law played out; “bad money (Silver) chased away good money (Gold). The British monometallism survived for about a century after that incident.
The acceptance of double or multiple ‘money’ in an economy is injurious, and destructive and ridicules the government’s stance on critical policy matters.
It happened to the French and other countries that permitted it. It can happen to any economy that is carefree about its currency management. It is already happening in Nigeria even when dual currency operations do not have an official stamp in the country.
The Naira is of a very young age with its history dating back to January 1st, 1973 when it replaced the Pound Sterling. The exchange rate was N2.00 for a Pound. N1.00 exchanged for about US $1.45. That was under the fixed exchange rate system.
The Naira remains Nigeria’s only legal tender but the American dollar is increasingly beginning to serve as Nigeria’s alternate currency.
The dollar has been positioned to play an overwhelming role as the medium of exchange, store of wealth and unit of Account in Nigeria; functions that are traditionally reserved for the domestic currency.
In addition to these roles, the dollar now serves as a rated gift item and the ubiquitous responsibility of storing stolen funds. Its stable value has made an attractive instrument for the store and transfer of illicit funds. The Nigerian economy is, therefore, being unofficially dollarised.
Dollarisation is a concept that is misunderstood most of the time. Investopedia defines it as implying ‘’a country’s recognition of the US dollar as the medium of exchange or legal tender alongside or in place of its domestic currency’’ while Cambridge Dictionary sees it as ‘’an act or process of replacing a country’s currency with the US Dollars’’. The Corporate Finance Institute captures it as ‘’the process by which a country decides to use two currencies – the local currency and generally a stronger, more established…’’.
Interestingly Andrew Berg and Eduardo Borensztein writing for the International Monetary Fund in International Issue Number 24 in the year 2000 made it clear that dollarization, official or unofficial, formal or informal, limited or full as is ‘’…a shorthand for the use of foreign currency by another country’’ for transactional purposes as well as for the other functions which the domestic currency is designated to perform.
This would imply that the two currencies are used alongside each other or that the foreign currency (not necessarily but usually the US Dollar) replaces the domestic currency. Hence dollarization could also be seen from the perspective of currency substitution.
Thus, as was pointed out in WallStreetMojo, a country may decide to officially or unofficially, partially or fully accept a foreign currency as its legal tender.
This would encourage the holding of foreign and domestic assets in the preferred currency while the monetary authority may provide windows for both the citizens and foreigners to operate foreign currency-denominated accounts in deposit money banks in the country.
Dollarization is usually a response to loss of confidence by both investors and consumers in the domestic currency.
While the investors would want to protect their assets, the consumers would naturally want to guide against inflation or even hyperinflation and general instability of the macroeconomic variables.
In a situation like this holding a likely stable basket of assets which includes the preferred foreign currency becomes irresistible. Ironically, the prevalence of such hedge-induced microeconomic decisions by various economic units will snowball into macroeconomic instability, and possibly to an economic shock of greater proportions.
The dollarisation of the Nigerian economy is informal. Yes, it is unofficial, at least to the extent that the once-in-a-long-while backing by the Central Bank can pass a message that the Naira and not the dollar is Nigeria’s legal tender. But unfortunately, some actions of the Government and the Monetary Authority indicate subtle support for the same from those quarters.
In other words, the federal government of Nigeria through its Central Bank unofficially endorsed the dollarization of the Nigerian economy. It is unofficially official by virtue of the uncommon decree 17 of 1995, the Guidelines, Directives, Pronouncements and Intermittent memos of the apex bank.
The intention of these laws and regulatory measures was, no doubt to stabilise the foreign exchange market and instill confidence in the minds of investors and consumers.
These were occasioned by the volatility of the Nigerian economy in the 1980s and 1990s consequent on the gross imbalance in the external account.
But the design and implementation of those laws seemed not to have been properly thought out, at least on their implications for the dollarization of the Nigerian economy.
The Foreign Exchange (Monitoring and Miscellaneous Provisions) Act, Decree 17 of 1995 unofficially birthed Dollarisation of the Nigerian economy.
The Act created the Autonomous Foreign Exchange Market, listed the instruments of transactions in the market as well as the sources of foreign currency for the transactions.
The instruments include foreign bank notes, foreign currency, travellers’ cheques, bank drafts and mail or telegraphic transfers.
The stream of foreign currency inflows into that market is varied and more or less open-ended. A mention of same here is necessary.
They are ‘’domiciliary accounts, foreign currency held by Nigerians returning home from places outside Nigeria and foreign national resident in Nigeria; agency commissions, professional fees, other forms of invisible earnings; non-oil export proceeds earned by exporters of Nigerian commodities and foreign currency held by Nigerian citizens resident in Nigeria’’.
Additional sources include; ‘’foreign currency imported by foreign nationals to purchase goods in Nigeria; foreign currency imported or held by foreign embassies, high commissions and international organisations from external sources; foreign currency imported by foreign tourists into Nigeria and foreign currency provided by the Central Bank among others’’.
It is also this statute, decree 17 of 1995 that established the Bureau the Change by virtue of its section 5 that empowered the CBN to appoint authorized Dealers in Foreign Exchange. This law has turned Bureau De Change operations to a contraption to the extent it has diminished the functionality of the Naira even as it enthroned the US dollar as the choice currency in the Nigerian economy.
It not only loosened the ends of both the supply and demand of the major international reserve currency but also permitted governments indirect support of actions that are inimical to genuine operations of a parallel foreign exchange market.
Section 1.3 of the CBN’s Guidelines for Bureaux De Change (2002) mainly talked about the operators dealing with small scale foreign exchange without defining the meaning of small. It also suffices to say that while section 7.2 of the Guidelines expressly allowed the Bureau De Change to get its fund from autonomous sources its section 8 clearly identified ‘’private sources or such other sources, including the IFEM, as the Central Bank of Nigeria shall define from time to time for the purpose of Business Travel Allowance [BTA] and Personal Travel Allowance [PTA]’’ as the major routes of foreign currency inflow of these operators.
What these provisions imply is that the operators are required to look for foreign currency wherever they can find it to complement the official allocation by the Central Bank through the IFEM. This is certainly nothing but ‘official partial dollarization’ which at best would give a boost to the black economy while distabilising the open economy through exchange rate manipulation.
This unrestrained liberalisation of Nigeria’s Foreign Exchange Market is certainly connected with the ‘conditions and condionalities’ of accessing foreign loans and aids as pushed forward by the neo-liberal International Financial Institutions consequent on the economic shock which the nation was experiencing in the 1980s and 1990s.
In an intrinsically the same way, it is difficult to exempt the Central Bank of Nigeria from an overt support for dollarization when it benched-marked payment to beneficiaries of diaspora remittances in US dollars. In its Circular dated 3rd December 2020, it warned Banks and International Money Transfer Operators (IMTOs) against paying beneficiaries of diaspora remittances in Naira despite the subsisting directive that prescribed payment in foreign currency, preferably in US dollars only for the same to be reversed in ‘Naira for Dollar Scheme’ announce in March 2021.
The provisions of both the original Guidelines on International Money Transfer Services in Nigeria of 2014 and its Revised edition of 31st January 2024 provided Naira as a payment option for Diaspora remittances. Although these provisions may be targeting on boosting foreign exchange liquidity, they are certainly counterproductive to the economy in the long run as they expose the Naira to an undue competition with a preferred foreign currency.
The bottomline of those hasty and poorly articulated Foreign Exchange policies are encountered in every sector of the economy as they become permanent features of our economic life.
It is no longer a news that many Internal Airlines have been demanding payments in US dollars and where they do not do so, they strictly benchmark their fare on US dollars even when the purchasing power parity of the Naira should have defined the baseline pricing.
It has also been reported that some foreign embassies quote and collect their visa fees as well as other payments in US dollars, an action that violates one of the fundamental principles of diplomatic relations.
It has also become a common experience for landlords in high cultural pretentious areas to demand rents in dollars. This happens in cities like Lagos, Abuja, Porth Harcourt, Kano and even Kaduna. Some rated hotels, interestingly tacitly quote their rates in US dollars with the Naira as a payment option.
Recently, a newly established university located in the Rivers state, Wigwe University advertised for admissions and quoted its school fees and associated charges only in the US dollars.
There was no mention of Naira as payment option anywhere in that advert which has been on for more than six months. This is simply an escalation of the damage which the proprietors of some private secondary schools have been doing to the Naira.
They not only operate foreign curricula but, in many cases, also demand and receive their fees in the US dollars. Some of them don’t even have the Naira as a currency of payment option.
It suffices also to say that Nigeria’s brand of federalism is inherently characterised by multiplicity of budgets. The implication of this is the obvious bloated fiscal operation that causes huge leakages from both revenue and expenditure sides while the fiscal structure has simplified ways and means of pulling out those proceeds of corruption from the system.
This along with several other shenanigans of the black economy sees the Naira as a weak currency to store the loots.
This way the US dollar has become a preferred currency for the criminal minds within the power corridor as that ensures that a billion Naira bribe could easily be starched away with little difficulty. Naira cannot server that purpose. The Dollar can.
The above picture captures what may be regarded as the primary demand factors of the dollar in the black economy and the parallel market in Nigeria.
Apart from them we also have the importers (genuine or smugglers) and others who make either sundry payments or services transfers abroad who also go for the dollar certainly due to the difficulties associated with accessing the same from the official source.
But where there is demand the existence of supply in inevitable. Yes, you cannot dollarize the economy without a cheap access to the dollar. In fact, in the language of the orthodox free market economist, Jean-Baptiste Say, ‘supply creates its own demand’.
But interestingly the government complemented the market by creating the supply channels of dollar as mentioned earlier.
Outside the official sources we also have; undeclared export earnings, smuggling of the currency into the country, surreptitious activities of the banks, banking executives and some other players in the financial services industry, diaspora remittances outside the official channel, speculators among others.
With the possible exception of the last two, the remaining sources of the dollar in the black economy and the parallel market are within the purview of public policy. In other words, a well-articulated fiscal policy and monetary policy have the capacity to block illicit flow of dollar in the economy.
Recommended reading: EFCC to enforce laws against dollarization of the economy, Naira Mutilation
This way it could be said that dollaristion of the Nigeran economy is the result of bad fiscal and monetary policies. It feeds on policy disconnect or the non-existence of a sound framework of containing the excesses of the operators in the black economy.
It is fundamentally the offshoot of failure of central banking in the country. It has been given impetus by ineptitude on the part of economic intelligence units and enforcement agencies.
It must be unequivocally stated therefore, that we need to repeal and replace the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act, Decree 17 of 1995 or cause a comprehensive revision of the same.
That should also impact severally on the Guidelines of Guidelines for Bureaux De Change operations. You cannot have a million and one operators in the parallel Foreign Exchange Market and at the same time expect that the system will not be hijacked by criminal elements especially when the process of granting licenses is heavily corrupt.
Unless and until some of these decisive steps are taken to regulate the Foreign Exchange Market, exchange-related shock and dollar-scarcity-triggered instability will be continually transmitted to the Nigeria’s macroeconomy.
*Isaac Chii Nwaogwugwu, PhD is a Public Finance Expert and an Associate Professor of Economics at the University of Lagos.
It seems overly simplistic to attribute dollarization solely to legislation that refers to the US dollar and “some actions of the Government and the Monetary Authority indicate subtle support.”
A deeper analysis would reveal that the erosion of confidence in the Naira among Nigerian citizens and business leaders is rooted in decades of fiscal and monetary mismanagement. Specifically, the federal government’s persistent unsustainable budget deficits, largely funded by the CBN’s imprudent expansion of the money supply, have fueled domestic inflation rates above 10% per year for the last decade, which in turn has eroded the value of the Naira not just against the dollar, but against all global currencies.