Nigerians prefer foreign currencies to Naira for wealth protection ─Report

*Economists in a report link currency substitution to Nigeria Naira volatility and inflationary rate, as consumers’ use of Dollars exceeds IMF’s 30 percent threshold

Isola Moses | ConsumerConnect

A research paper in a journal published by the Central Bank of Nigeria (CBN) has indicated some Nigerians have been accumulating foreign currencies to protect their wealth from Naira volatility and surging inflationary trend in the country’s economy.

The economists noted that the ratio of foreign cash deposits to Naira deposits on demand in the banks has exceeded the International Monetary Fund’s (IMF) 30 percent threshold.

“Higher real-exchange rate volatility is associated with an increased level of currency substitution,” stated the CBN economists, including Isaiah Ajibola, Sylvanus Udoette, Rabia Muhammad and John Anigwe in the paper available on the Bankers’ Bank Web site.

According to the experts, there is a need to contain “exchange-rate volatility and inflation as a way of curbing the spate of currency substitution in the country.”

The researchers said that a measure of currency substitution, which is the ratio of foreign cash deposits to Naira deposits on demand in the banks, had exceeded the IMF 30 percent threshold from 2009, due to the global financial crisis.

The development, however, hit a peak of 98.2% in 2014 before declining to 83% in 2018. A broader measure of foreign currency in banks to Naira savings, demand and term deposits, stayed largely within the IMF limit over the study period from 1995 to 2018.

It is noted that Africa’s largest economy devalued the local unit twice last year after a crash in the oil price triggered by the coronavirus pandemic hampered revenues.

While crude contributes less than 10 percent to the country’s Gross Domestic Product (GDP), it accounts for nearly all foreign exchange (Forex) earnings and half of government revenue in the continent’s biggest producer of the commodity.

The country’s currency Naira reportedly lost 66 percent of its value since 2009 when it exchanged at 149 Naira to the Dollar.

The unit traded at 409.35 Naira per Dollar at the spot market as of 5:27 p.m. in Lagos on Wednesday, Bloomberg report said.

Nigeria’s inflation quickened to the highest level in four years in March and is now more than double the 9 percent limit of the central bank’s target range.

The CBN hitherto had issued a warning to merchants to stop offering local goods in foreign currency and also banned the practice of accessing the foreign-exchange market for settling domestic transactions.

The researchers further stated: “The key policy implication of currency substitution is that it reduces monetary policy effectiveness.

“Efforts to further diversify the economy should be of paramount interest to boost the base for foreign-exchange earnings.”

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