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Sunday 31 May 2015

IMF HIGHLIGHTS DANGERS OF DOLLARISATION IN NIGERIA, OTHERS

Central Bank of Nigeria.
The International Monetary Fund (IMF) has pointed out that dollarisation, if left unchecked will remain an important challenge to policymakers in Nigeria and other African countries.

According to the multilateral agency, dollarisation constrains the capacity of monetary authorities to act as a lender of last resort, hampers banks’ liquidity management and weakens the stability of the financial sector. The Fund also noted that dollarisation may amplify the impact of exchange rate movements on banks’ balance sheets, thereby increasing the risk of contractionary effects and bank failures.

The IMF stated this in its 75-page report titled: “Dollarisation in Sub-Saharan Africa: Experience and Lessons.”

Dollarisation is a situation where the citizens of a country officially or unofficially use a foreign country’s currency as legal tender for conducting transactions.

According to the IMF, dollarisation can complicate the implementation of economic policies through various channels as it would expose the balance sheets of the public sector, private enterprises, and households to exchange rate risks, when assets and liabilities in foreign currency are mismatched.

Furthermore, it noted that it also reduces the abilities of governments to issue medium-and long- term debt in domestic currency.

“Currency mismatches represent a major financial risk for dollarized economies. Significant use of foreign currencies can create risks from unmatched foreign currency assets and liabilities and from foreign currency debt obligations unmatched by similarly denominated earnings.

“These risks are most pronounced when the banking system holds a large amount of foreign currency deposits or other liabilities while its assets are mostly denominated in the national currency. In such a case, banks may face solvency problems when the national currency depreciates sharply. Public fear of such a scenario could trigger capital flight, resulting in self-fulfilling expectations,” it added.

In Nigeria, the Central Bank of Nigeria (CBN) has continued to kick against the seeming dollarisation of the economy, even as the regulator had restated its resolve to prosecute anyone found transacting business in the country with any foreign currency as a medium of payment.

The central bank had said it had observed that some institutions price their goods and services in foreign currencies and demand payments in foreign currencies rather than the domestic currency (the naira), which is the legal tender in Nigeria.

Part of the CBN Act 2007, states inter-alia that “the currency notes issued by the Bank shall be legal tender in Nigeria…for the payment of any amount”.

The CBN Governor, Mr. Godwin Emefiele had also insisted that the currency for transacting business in the country remains the naira and had warned that it is illegal to carry out transactions using the US dollar. He had said the CBN would in due course go after those who violate the policy.

Nevertheless, the IMF pointed out that dollarisation may also have some merit in specific circumstances.

“In economies with high and volatile inflation, allowing foreign currency deposits may encourage residents to transact through the banking system rather than deposit money abroad or hold their savings in non-monetary assets. The use of a foreign currency can also bring credibility to a country’s disinflation efforts, notably in situations of very high inflation,” it added.

This Day, Nigeria

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