- Move linked to naira volatility and fears of depreciation in value
Nigerians have been accumulating foreign currencies in a bid to protect their savings, and wealth from the negative impact of naira volatility, a recent research paper published by the Central Bank of Nigeria indicates.
According to the bank’s economists including Isaiah Ajibola, Sylvanus Udoette, Rabiu Muhammad and John Anigwe, higher real-exchange rate volatility is associated with an increased level of currency substitution and as such there is a need to guard against “exchange-rate volatility and inflation as a way of curbing the spate of currency substitution in the country.”
According to the researchers, the ratio of foreign cash deposits to naira deposits on demand in the banks exceeded the threshold recommended by the International Monetary Fund following the global crisis of 2009 which is put at 30%, the researchers said.
It 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.
The naira has continued to receive bashings amidst crash in global oil prices influenced largely by the country’s dependence on oil revenue.
The naira was twice devalued last year after a crash in oil prices influenced by the Coronavirus pandemic which saw the fall in revenue.
Even though crude oil contributes less than 10% to the overall gross domestic product of the country, it unfortunately accounts for almost all of the nation’s foreign-exchange earnings as well as half of the government’s revenue, a situation which experts and economic analysis have continually warn is dangerous for the country.
Nigeria is the continent’s biggest producer of the commodity but it’s efforts to diversify its earnings has not yielded impactful results in a country that boasts of a population of about 200 million. The naira has seen a loss of about 66% of it’s value within the last 10 years. It exchanged for 149 naira to the dollar in 2009 but currently exchanges for 381.00 as at 3.00pm this Friday while it goes for 470 at the black market.
Nigeria’s inflation rose to the highest level in four years in March and right now is more than double the 9% limit of the central bank’s target range.
“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.”