Nigerians who are afraid that the value of the naira may become worthless and inflation might reck further havoc 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. There is a need to contain “exchange-rate volatility and inflation as a way of curbing the spate of currency substitution in the country,” they said.
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% threshold from 2009 following the global financial crisis, the researchers said. It hit a peak of 98.2% 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.
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.