Deposits in Nigeria banks make up 40% United States (U.S.) dollars, the International Monetary Fund (IMF) has said. The IMF described the practice as a confirmation of loss of confidence in the local currency, adding that “it is usually difficult to reverse”.
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According to the IMF, market participants defend their wealth by shifting to dollar savings under high and persistent inflation.
In its Report on dollar savings, the Fund said “Nigeria operates with dollar bias for international trade, finance invoicing and of recent, store of value. Over 40 per cent of Nigeria’s bank deposits are in dollars”.
The IMF said the process of reversing citizens’ savings in dollars could be complex even after addressing the initial trigger, such as high inflation and exchange rate volatility.
The use of dollars for storing value worsened in the country following the implementation of the naira redesign policy and issuance of new banknotes by the Central Bank of Nigeria (CBN).
Under the policy, the CBN introduced new 1,000, 500 and 200 naira denominations and withdrew the old notes from circulation.
Analysts said the redesigning of the bank notes could inadvertently lead to the dollarisation of the domestic economy.
The IMF said most economies operate with a foreign exchange (FX) – the dollar bias for international trade and finance invoicing.
The IMF explained that in a highly dollarised economy, there is extended use of the exchange rate for price indexation (high real dollarisation and almost complete pass-through from depreciation to inflation). Forex is also used in foreign trade.
It said: “There is limited scope for fiat currency (tax payments, public expenditure, non- durable goods, and low- value transactions; extended forex use for durable goods, real estate, capital goods, and high-value transactions. Also, forex takes over the role of store of value as lending capacity in domestic currency becomes limited. Most loans become forex- denominated when forex bank deposits are allowed.”