By Babatunde Ayedoju

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since mankind began to live in communities, there has always been a need to transact one business or the other and usually there will be a means of making payment. First, it was trade by barter, a system where Mr A would give Mr B what he needed in exchange for something that Mr B had which Mr A needed.

As civilisation evolved, people devised other means to make payment. At various points in time, mankind has adopted various objects such as cowrie shells, horse shoe, salt and many others.

Coming to Nigeria, as the colonial masters came, they introduced various currencies such as penny, shilling and British pound, among others. On January 1, 1973, Nigeria adopted naira and kobo as legal tender.

Each country in the world has its own currency. For example, while Nigeria spends naira, countries in the European Union spend Euro, dollar in the US, Yen in Japan, Zimbabwean dollar in Zimbabwe and many others.

Everyday, people transact business across national borders. For example,  Nigeria spends naira, while China spends yuan. The naira of Nigeria cannot be spent in China, just as the yuan of China is useless in Nigeria. Therefore, when a Nigerian wants to transact business with  a  Chinese, they   negotiate and agree on the price in dollar. Having agreed on the price, the Nigerian  converts  his money in naira to dollar. By the time he makes his payment, the Chinese will convert the dollar to  yuan that is spent in his country.

As a result of that, the strength of each country’s currency is measured by the rate at which it is exchanged with the dollar, though British pound Sterling and Euro are stronger than the American legal tender.

Therefore, while naira remains Nigeria’s legal tender for trade within the country, dollar ought to be used only for international trade. Unfortunately, in the wake of dwindling exchange rate of naira to dollar, a lot of Nigerians now use the American dollar for certain local business transactions.

For example, some hotels, schools, hospitals and even landlords, especially in high  brow areas have been reported to demand payment in dollar. In fact, there are allegations that some delegates at a certain party primary elections were bribed in foreign currency, though such allegations were not proven to the public.

The persistent use of dollar for transactions within Nigeria has led to what is now known as the dollarisation of Nigeria’s economy which has contributed to the weakness of the naira exchange rate and distorted monetary policy transmission, despite increased efforts by the Central Bank of Nigeria (CBN) to strengthen the naira through its intervention in the forex as well as its development of  finance initiatives.

Dollarisation which is the use of foreign currencies as a medium of exchange, store of value, or unit of account has emerged as a key factor explaining vulnerabilities and currency crises. Data from Nairalytics, a data-sharing portal, reveals that the oil sector provides for 85 percent of Nigeria’s export earnings and 55 percent of its government revenues, making the nation highly dependent on the dollar for its survival. It appears a lot of financially savvy Nigerians know this already and are increasing their dollar positions.

Nigeria, Africa’s biggest crude oil producer, has been heavily impacted by the plunge in crude oil prices as a result of the outbreak of the COVID-19 pandemic, with the nation’s authorities adjusting the naira twice in 2020 to deal with the severe impact of the pandemic.

Aside the drop in foreign exchange revenues from crude oil export, diaspora remittances, which made up about five  percent of Nigeria’s GDP in 2019, also experienced a significant decline in 2020. That was equally attributed to the severe impact of the COVID-19 pandemic.

In the past, the CBN threatened to prosecute anyone found transacting business in the country with foreign currencies as medium of payment.

This was in line with provisions of the CBN Act of 2007 which states that “the currency notes issued by the Bank shall be legal tender in Nigeria…for the payment of any amount.”

Furthermore, the Act stipulates that any person(s) who contravenes this provision is guilty of an offence and shall be liable on conviction to a prescribed fine or six months imprisonment.

According to media report last month, the CBN Governor, Mr Godwin Emefiele, said, “We will be looking at areas where people are making demands for foreign currency; people who are landlords who are asking for rent in dollars; schools that are asking for school fees in dollars or transacting business in dollars.”

This dollarisation of the Nigerian economy, which some have attributed to the recent wave of the depreciation of the Naira, has already sparked off a trend of financial transactions that will not only further weaken the exchange rate and purchasing power of the Naira, it can also make the country perpetually dependent on Western economies.

According to the International Monetary Fund (IMF), dollarisation can pose important challenges to policymakers. It can also weaken the capacity of monetary authorities to act as a lender of last resort; hamper banks’ liquidity management; and weaken the stability of the financial sector, as it may amplify the impact of exchange rate movements on banks’ balance sheets, thereby increasing the risk of contractionary effects and bank failures.

Speaking on the implication of the dollarisation of Nigeria’s economy, Dr Chris Ofonyelu from the Department of Economics, Adekunle Ajasin University, Akungba-Akoko, noted that, indirectly, dollar becomes part of Nigeria’s money in circulation. He said that people would begin to prefer dollar to naira, which is actually happening already, as some institutions are said to be requesting that clients  pay for services rendered in dollar.

Ofonyelu likened an increase in the use of dollar for local transactions to an increase in import, which will not help the economy at all. 

While noting that in an ideal economy, government should criminalise dollar and come up with legislations that will discourage the use of foreign currency.

 The economic expert said, “The CBN is not firm. Government too appears not to be firm. It does not seem that the government will do anything about it.   So, it is a reality that we may have to continue living with. I think the trend will continue and all of us will become worse off for it.”

Similarly, Dr Bayo Fasunwon from the Department of Political Science, Adekunle Ajasin University, Akungba-Akoko, noted that with  seeming dollarisation of the economy, there is going to be a high demand for foreign currency which will continue to have an adverse effect on the exchange rate of naira with  other currencies. Based on that, the political economist believes that it will take at least a year for the naira to gain some strength.