Nigeria’s implicit dollarisation endangers economy, weakens naira

President Bola Ahmed Tinubu’s administration has been engaging in a lot of ‘trial and error’ in its quest for an improved and sustainable foreign exchange (FX) inflow since its inauguration in May 2023. It has even shown more desperation in its local revenue drive — engaging in initiatives that range from the absurd to the ridiculous. The latest in these efforts is the opening of offers for its first-ever dollar-denominated domestic bond, valued at $500 million, on Monday, August 19, 2024.

The bond, part of the Federal Government’s financing initiatives, carries a 9.75 percent per annum interest rate with a five-year maturity to 2029. Auction for the bond remains open till August 30, 2024; and it is available to a wide range of investors, including Nigerian residents, individuals with savings abroad, members of Nigerian diaspora, and qualified institutional investors. According to the Debt Management Office (DMO), the bond issuer, investors can purchase units at a minimum subscription set at $1000 each, with an initial minimum subscription set at $10,000 (10 units). Subsequent investments can be made in multiples of $1000.

According to the DMO, the bond is part of the government’s broader strategy to tap into domestic and diaspora investments — via a secure and attractive investment vehicle with the backing of the full faith and credit of the Federal Government of Nigeria. Earlier in the year, the CBN had, through the sale of attractive Treasury Bills, attracted Foreign Portfolio investments (FPIs) which the apex bank had been deploying in the FX market to stabilise the naira. But, being ‘hot money’, such FPIs have been ‘flying away’ as soon as they were attracted. And so, the FX market volatility remained unabated; and FX scarcity subsists.

In all of these, however, there is the danger of dollarisation of the Nigerian economy — especially in this case of a dollar-denominated local bond. Dollarisation happens when a country begins to recognise the U.S. dollar as a medium of exchange or legal tender alongside or in place of its domestic currency. Dollarisation normally occurs when the local currency has become unstable and begun to lose its usefulness as a medium of exchange for market transactions. This is exactly the fate of the naira which has also since lost its function as a store of value and standard for deferred payment.

Overtly or covertly, therefore, the ongoing issuance of a domestic dollar-denominated bond is an outright dollarisation of the economy. Period! Section 15 of the CBN Act 2007 states that “The unit of currency in Nigeria shall be the naira which shall be divided into one hundred kobo.” Section 20 (1) of the Act states that “The currency notes issued by the Bank shall be legal tender in Nigeria at their face value for the payment of any amount.” The ongoing dollar-denominated bond sale in Nigeria, therefore, is an official dollarisation or the introduction of what the IMF calls a ‘bi-monetary’ system.

The IMF had in a report in 2022 (“Digital Money and Central Banks Balance Sheet”) warned that in a bi-monetary system (like Nigeria) the local currency is used more for payment transactions but is replaced by the dollar as a saving asset or store of value, in line with Gresham’s law (“Bad money drives out good”). The bi-monetary system also limits the role of the exchange rate as a shock absorber, as real dollarisation implies a high pass-through from exchange rate depreciation to inflation.

In deepening the dollarisation process, the current dollar-denominated bond (of which the $500 million is the first tranche) would be listed on the Nigerian Exchange Limited and FMDQ (over the counter) Securities Exchange Limited — “to enhance its liquidity and accessibility for investors,” according to the DMO. The transaction documents show that the Nigerian government hopes to double its offer amount as it targets $1 billion in subscriptions through the ongoing bond auction.

Unsurprisingly, many of these fiscal and monetary initiatives of the Bola Ahmed Tinubu administration have not had wholesome effects on the economy. Whether it is fuel subsidy removal or exchange rates merger in the FX market or continued increase in the Monetary Policy Rate (MPR) — all have unleashed largely (negative) unintended effects on the economy. Apparently, in desperation, the government has in the past fifteen months kept tinkering with all manner of initiatives and policies to even stabilise the economy.

Yet, practically all economic indices have continued to trend in the wrong direction: inflation has attained a three-decades high of over 34 percent by June 2024; the exchange rate of the naira in the FX market remains high and unstable (even at N1600/$); huge public debt overhang of up to N121 trillion; hiked electricity tariff and rising pump prices of fuel (Premium Motor Spirit, PMS) necessitating resumption of subsidy payment.        

Apparently at its wits end, in the past few months, the administration had peremptorily tinkered with the Finance Act 2023, to retroactively levy deposit money banks (DMBs) with what it termed a “windfall tax.” The tax, the first of its kind in the country, is targeted at the quantum of profit made by the DMBs in 2023 due to the gross devaluation of the naira, as a result of the failed policy of FX rates unification of the Central Bank of Nigeria (CBN). In 2023, banks with a lot of dollar-denominated assets reaped bountifully from the crash in the value of the naira in the FX market.

Although the National Assembly has since altered the 2023 Finance Act as requested by Mr. President, the effectuation of the new legislation is yet shrouded in controversy and confusion. This is because it could amount to double taxation on the DMBs; and the tax obviously sends ominous signals to stakeholders, especially now that most of the DMBs are in the process of raising fresh equity funds from local and foreign investors — in pursuit of the new minimum capital base ordered by the CBN.

A few months ago, in yet another gambit in revenue drive, the federal government made moves to levy on the citizenry, what it called “cybersecurity tax” — targeted at every one that carries out any online or digital financial transaction. This initiative generated a lot of public uproar, angst and opprobrium, forcing the government to ‘suspend’ its implementation. The cybersecurity tax, if implemented, would have been a counterpoise to the spread and deepening of financial inclusion and cashless economy initiatives of erstwhile administrations.

For over two decades, Nigeria, through the CBN, has been relentlessly implementing the ‘cashless economy’ initiative under which digital (banking) transactions are expected to completely take over physical cash. Under the policy, digital channels such as debit cards, credit cards, internet banking, mobile wallets, electronic fund transfers and digital currencies are to be used to carry out day-to-day transactions. Cybersecurity levy would have turned a discouragement to users of these channels, as against analogue banking and use of cash.

Yet in seeming desperation, the federal government also recently got the National Assembly to alter the CBN Act 2007, to enable the apex bank to extend more loans to it via the ‘ways and means’ window. Specifically, the government moved its scope of access to CBN loans from five percent of its (Government) previous year’s total revenue to (now) ten percent. This new order carries with it so much economic distortions, especially quantum increase of money supply/circulation — leading to high jumps in inflation rates and sundry challenges.

Against this backdrop, the domestic dollar bond issuance and its implied entrenchment of a bi-monetary system by the federal government of Nigeria leaves the economy with a dicey outlook. This implicit dollarisation of the Nigerian economy portends a further weakening and relegation of the naira. Naturally, economic agents in Nigeria will certainly pander to holding dollar assets in whatever form or shape. That’s dollarisation; no more; no less.

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