Nigerians have been accumulating foreign currencies to protect their wealth from naira volatility and surging inflation, according to a research paper in a journal published by the Central Bank of Nigeria.
Higher real-exchange rate volatility is associated with an increased level of currency substitution,” central bank economists including Isaiah Ajibola, Sylvanus Udoette, Rabia Muhammad and John Anigwe said in the paper available on the central bank’s website.
The report maintained that the economists stressed that there was a need to contain “exchange-rate volatility and inflation as a way of curbing the spate of currency substitution in the country”.
It posited that one measure of currency substitution, the ratio of foreign cash deposits to naira deposits on demand in the banks exceeded the International Monetary Fund’s 30 per cent threshold from 2009, following the global financial crisis, the researchers said.
It hit a peak of 98.2 per cent in 2014 before declining to 83 per cent 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.
Bloomberg 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 per cent to the country’s Gross Domestic Product, it accounts for nearly all foreign-exchange earnings and half of government revenue in the continent’s biggest producer of the commodity.
The naira has lost 66 per cent of its value since 2009 when it exchanged at N149 to the dollar. The unit traded at N409.35 per dollar at the spot market as of 5:27pm in Lagos, Nigeria’s inflation quickened to the highest level in four years in March and is now more than double the nine per cent limit of the central bank’s target range.
The central bank previously 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 key policy implication of currency substitution is that it reduces monetary policy effectiveness,”the researchers said.
“Efforts to further diversify the economy should be of paramount interest to boost the base for foreign-exchange earnings,” they added.
