A New Monetary Policy For Nigeria Is Needed

Introduction

De-Dollarization: A Path to Economic Sovereignty for Nigeria







The issue of de-dollarization, or reducing the influence and use of the United States (US) dollar in a country's economy, has gained increasing attention and relevance in recent years. This is especially the case for developing countries like Nigeria, which face various economic and social challenges due to their high dependence on the US dollar for international trade, foreign exchange, and domestic transactions. The main objective of this project is to examine the impact and implications of de-dollarization for Nigeria's economy, and to propose some policy recommendations and actions for achieving this goal. The project will cover the following main points:

  1. -The current situation and problems of dollar dependence in Nigeria's economy
  2. -The benefits and costs of reducing dollar dependence in Nigeria's economy
  3. -The policy recommendations and actions for achieving de-dollarization in Nigeria's economy








The current situation and problems of dollar dependence in Nigeria's economy

Nigeria's economy is highly dependent on the US dollar for various reasons, such as:

- The reliance on crude oil exports, which are priced and paid in US dollars, as the main source of foreign exchange earnings and government revenue.
- The importation of a large share of consumer and capital goods, which are also priced and paid in US dollars, due to the low level of domestic production and industrialization.
- The widespread use of the US dollar as a store of value, a medium of exchange, and a unit of account in the domestic market, especially for high-value transactions, due to the lack of confidence in the local currency, the naira.
- The exposure to external shocks and pressures, such as fluctuations in global oil prices, trade and financial sanctions, and currency speculations, which affect the supply and demand of US dollars in the foreign exchange market.

The dependence on the US dollar has created several problems and challenges for Nigeria's economy, such as:

  • The loss of monetary policy autonomy and effectiveness, as the Central Bank of Nigeria (CBN) has to intervene frequently and heavily in the foreign exchange market to defend the naira and maintain multiple exchange rates, which limits its ability to control inflation and interest rates
  • The erosion of the value and purchasing power of the naira, as the official exchange rate has depreciated from 197 naira per US dollar in 2015 to 524 naira per US dollar in 2024, while the parallel market rate has reached as high as 1,524 naira per US dollar in 2024, reflecting a 230% loss of value in the last year
  • The increase in the cost of living and doing business, as the high inflation rate, which rose to 29.9% in January 2024, its highest since 1996, mainly driven by food and non-alcoholic beverages, has reduced the real income and savings of households and firms, and made imported goods more expensive and scarce
  • The deterioration of the balance of payments and the fiscal position, as the trade deficit, which widened to $15.7 billion in 2023, its highest since 2016, and the budget deficit, which increased to 8.9% of GDP in 2023, its highest since 1991, have depleted the foreign exchange reserves and increased the external debt burden
  • The reduction of economic growth and development, as the low level of investment, productivity, and competitiveness, coupled with the high level of unemployment, poverty, and inequality, have constrained the diversification and transformation of the economy and the improvement of the living standards of the population


The benefits and costs of reducing dollar dependence in Nigeria's economy

Reducing dollar dependence, or de-dollarization, is the process of decreasing the use and influence of the US dollar in a country's economy, and increasing the role and value of the local currency. De-dollarization can have both benefits and costs for Nigeria's economy, such as:



The benefits of de-dollarization include:

  1. - Enhancing the monetary policy autonomy and effectiveness, as the Central Bank of Nigeria (CBN) would have more control over the money supply, inflation, and interest rates, and less need to intervene in the foreign exchange market to defend the naira
  2. - Improving the value and stability of the naira, as the demand and supply of the local currency would be more balanced, and less affected by external shocks and speculations, which would reduce the exchange rate volatility and inflationary pressures
  3. - Reducing the cost of living and doing business, as the lower inflation rate and exchange rate would increase the real income and savings of households and firms, and make imported goods more affordable and available
  4. - Strengthening the balance of payments and the fiscal position, as the trade surplus and the budget surplus would improve, and the foreign exchange reserves and the external debt burden would decrease
  5. - Stimulating economic growth and development, as the higher level of investment, productivity, and competitiveness, coupled with the lower level of unemployment, poverty, and inequality, would foster the diversification and transformation of the economy and the improvement of the living standards of the population




The costs of de-dollarization include:

  1. - Increasing the transaction costs and risks, as the conversion of foreign currencies to the local currency would entail higher fees, commissions, and exchange rate losses, especially for international trade and financial transactions
  2. - Exposing the economy to domestic shocks and uncertainties, as the fluctuations in the local currency value and the domestic economic and political conditions would affect the confidence and expectations of the economic agents, and potentially trigger capital flight and currency crises
  3. - Reducing the access to international financial markets and resources, as the lower demand and supply of the US dollar would limit the availability and attractiveness of foreign financing, investment, and aid, and increase the borrowing costs and the default risks
  4. - Facing the resistance and opposition of some stakeholders, such as the importers, exporters, speculators, and rent-seekers, who benefit from the dollarisation of the economy, and may lobby against the de-dollarization policies and measures


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The policy recommendations and actions for achieving de-dollarization in Nigeria's economy

De-dollarization is not an easy or quick process, as it requires a comprehensive and coordinated approach that addresses the root causes and the consequences of dollar dependence in the economy. Some of the policy recommendations and actions for achieving de-dollarization in Nigeria's economy are:

  • - Improving the macroeconomic stability and credibility, as the CBN should pursue a consistent and transparent monetary policy framework that targets low and stable inflation, a flexible and realistic exchange rate, and a sound and resilient banking system¹². The federal government should also implement a prudent and sustainable fiscal policy that reduces the budget deficit, the public debt, and the dependence on oil revenues
  • - Enhancing the domestic production and diversification, as the government and the private sector should invest more in the development of the non-oil sectors, such as agriculture, manufacturing, and services, and promote the value addition, the quality improvement, and the export orientation of these sectors¹². The government should also provide adequate infrastructure, incentives, and regulations to support the growth and competitiveness of these sectors
  • - Increasing the financial inclusion and innovation, as the CBN and the financial institutions should expand the access and affordability of the formal financial services, such as savings, payments, credit, and insurance, to the unbanked and underbanked segments of the population, especially in the rural areas³⁴. The CBN and the financial institutions should also leverage the digital and mobile technologies to offer more convenient, secure, and cost-effective financial solutions to the customers
  • - Enforcing the legal and institutional framework, as the CBN and the government should implement and monitor the existing laws and regulations that prohibit or restrict the use of foreign currencies in the domestic transactions, such as the CBN Act of 2007, the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act of 1995, and the Money Laundering (Prohibition) Act of 2011²⁵. The CBN and the government should also impose sanctions and penalties on the violators of these laws and regulations, and educate and sensitize the public on the benefits of using the local currency



    • What is the role of international cooperation and diplomacy in promoting de-dollarization?

    International cooperation and diplomacy can play an important role in promoting de-dollarization, which is the process of reducing the use and influence of the US dollar in the global economy. Some of the ways that international cooperation and diplomacy can facilitate de-dollarization are:


    1. - Creating alternative platforms and mechanisms for trade and financial transactions that do not rely on the US dollar or the US-dominated institutions, such as the SWIFT network, the IMF, and the World Bank¹². For example, the BRICS nations (Brazil, Russia, India, China, and South Africa) have established their own development bank, contingency reserve fund, and payment system to enhance their economic integration and independence

    2. - Developing and strengthening regional and bilateral currency arrangements that allow the use of local currencies or other reserve currencies, such as the euro, the yen, or the renminbi, in cross-border trade and investment¹². For example, China has signed currency swap agreements with more than 40 countries and regions, and has promoted the internationalization of its currency through the Belt and Road Initiative and the Asian Infrastructure Investment Bank

    3. - Engaging in dialogue and coordination to address the common challenges and opportunities of de-dollarization, such as the transaction costs and risks, the domestic shocks and uncertainties, the access to international financial markets and resources, and the resistance and opposition of some stakeholders. For example, the G20 and other multilateral forums can provide a platform for discussing and advancing the reform of the international monetary system and the diversification of the reserve currencies


      4. Conclusion

      The over-reliance on the US dollar has left our economy vulnerable to external shocks and currency fluctuations. Just look at the exchange rate today - it's over 1550 Naira to the dollar! Prices of basic goods have skyrocketed, leading to nationwide protests over the cost of living. How did we get here?

      Decades of fiscal mismanagement, corruption, and poor policy have eroded confidence in the Naira. Nigerians now readily accept and even prefer dollars for major transactions like school fees, rent, and business deals. This dollarization gives rise to parallel currency markets where exchange rates diverge wildly from official figures.

      The time has come to restore faith in the Naira. We must enact and enforce laws prohibiting the use of foreign currency in domestic transactions. The Naira must become the sole legal tender for all payments within Nigeria. We should follow the lead of other developing economies like China and India that are promoting use of local currencies.

      Reducing dollar dependence will require both fiscal prudence and monetary discipline. We must rein in deficits, lower debts, and implement sound policies that boost local production. An import-driven economy cannot de-dollarize. We must also diversify our trading partners beyond the West. Joining alliances like BRICS can open up new opportunities.

      There will be challenges to overcome like dealing with speculators who profit from Naira instability. We may face resistance from vested interests benefitting from the status quo. But the cost of inaction is too high. Persistent dollarization constrains the central bank's ability to manage inflation and the exchange rate.

      My friends, we stand at a pivotal moment in Nigeria's history. By restoring the Naira's primacy, we can insulate our economy, regain sovereignty, and set the stage for a more just and prosperous future. Difficult decisions lie ahead but I have faith that if we unite behind this cause, we shall overcome. The time for de-dollarization is now.

      Thank you. I welcome your thoughts on charting this new course for our economy. Together, we can build a Nigeria that works for all its citizens.

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