By Tunde Obadina
In its endeavour to shore up the naira currency the Central Bank of Nigeria (CBN) has in recent months taken steps to curb domestic use of foreign currencies in Nigeria. It barred authorised money dealers from importing foreign currency banknotes without prior approval and stipulated that beneficiaries of international money transfers must be paid in naira only. The regulator has also tightened restrictions on the operation of bureaux de change to limit demand for hard currencies.
According to monetary officials Nigeria has become one of the world’s largest importers of US dollar notes. Restricting domestic use of foreign currencies, they believe, is necessary to combat money-laundering, especially by corrupt politicians and Islamist insurgents. The CBN also wants to counter what it says is the dollarisation of Africa’s largest economy. Its aim of checking money laundering is undoubtedly commendable; but corruption is not the only driver in the growth in local usage of foreign currencies.
There are many legitimate reasons why people may choose to hold dollars or other currencies in preference to the local currency. Lack of confidence in the national monetary system is an obvious reason. Individuals and businesses may believe their interests are better served storing their wealth in assets that are more stable and less prone to losing value in the foreseeable future.
Money is in some ways similar to debt. Unlike barter, where people exchange commodities that both parties can immediately ascertain their respective value, a monetary transaction involves the seller receiving an item that has no inherent worth. The real value of money is determined at the time of its application as a means of exchange. For example, when customer A gives one dollar to shopkeeper B for a bar of chocolate, A receives a product which has instantly realisable utility. For B the actual worth of the dollar note will only be known to him when he deploys it in a future transaction. At that later time its purchasing power may provide more or less chocolate as at the time he accepted the note, depending on whether the currency has meanwhile appreciated or depreciated. When the seller exchanged his chocolate for money he acquired a note that contained a promise of future entitlement. He took a risk in doing so. He entered the transaction because he believed that the asset he receives will retain a value that is at least close to its present worth. His faith could prove to be misplaced, if when he comes to spend the money it buys much less in value than the chocolate customer A had long digested.
Given the volatility of money, the choice of people living in economies with high inflation and weakening local currencies to hold some of their wealth in sturdier foreign currencies is rational. It is a way to protect against risks of devaluation. Needless to say, governments and central banks throughout the world intensely dislike their citizens using foreign currencies. This is because the practice undermines their control over the financial system and the economy. The effectiveness of monetary policy is limited if members of the public can choose to ditch government-issued money in favour of other mediums of exchange and wealth storage.
Control over money supply is arguably the most wide-reaching and effective means the state has to affect the lives of individuals within its domain. People can ignore or circumvent most government regulations, such import bans and licensing laws, but holders of the national currency cannot easily escape the effects of state monetary actions. For example, when governments print large amounts of money, thereby fuel inflation, their action invariably devalues the money in the pockets and bank accounts of all who possess the currency. Citizens can evade paying direct taxes, but they cannot easily avoid the taxation effect of money printing. The state does not need to know of your existence or location to take your money.
Currency shifting by individuals and businesses to protect their wealth against the effects of poor state financial management is not peculiar to developing countries.It is world-wide. It is one of the reasons that the export of dollar notes is a big U.S. export. The relative stability and strength of America’s financial system is also a reason why individuals, businesses and governments across the world deposit most of their external reserves in the U.S.
In a free society individuals may hold their wealth in any form that does not violate the property rights of others. Individuals alone assume the risks involved in their investment decisions, including any limitations on the number of people willing to accept the currencies they possess. Some readers may think that this libertarian perspective only benefits rich people with money. This is not so. Poverty does not mean being penniless, it is having very little amounts of money. This is why the opportunity to choose currencies that are least susceptible to depreciation is important for the poor. A subsistence farmer who saves 5,000 naira in an economy with 10% annual inflation rate will find that after a year his nest egg is worth only 4,500 naira in real terms. Had he changed his money into a more stable currency, the value of his meagre savings would have been better preserved.
Currency shifting is not necessarily an act of national betrayal. It is the case that rich people in developing nations keep much of their wealth in foreign assets, including overseas bank deposits.