How to suppress dollar demand in Nigeria: A quick introspection

Dear Africa interested individuals:
                                                             Dollar demand continues to rise in Nigeria where Naira is the official currency.  How can Nigeria suppress the demand for dollar and quickly?  It should be clear by now to all that the Naira has limited use because most of the things Nigerians desire must be manufactured outside Nigeria for the product to be considered real and worthy of purchase by consumers in Africa's most populated country.


This widely held purchasing character of the Nigerian consumer, has led to a continuous and ever increasing demand for the dollar by manufacturers, to purchase raw materials and finished goods for an ever increasing population.  This leads me into the probable solutions necessary to reduce dollar demand by Nigerians.


1. The Naira has to be made more attractive as a currency to hold.  This will encourage those who are hoarding dollars for speculative and legitimate reasons to sell their dollar and acquire Naira.  There will also be dollar inflows by fixed income portfolio investors and Nigerians in the diaspora.   Coupon rates on government bonds should rise to at least 20% and those selling dollars to purchase the bonds will be given first priority. The government will also assure investors of a fixed exchange rate (within a narrow band of 2%) when they decide to exit the bond.  There will be a 25% penalty on accrued interest for any investor that exits their position less than twelve months after purchase.  This in my opinion will attract huge dollar inflows to take advantage of the high coupon rates in conjunction with the assured stability on exchange rate conversion.  A form of this is already being practiced in Malawi since last year and has made Malawi Africa's best performing currency so far in 2015.  The Malawian Kwacha has appreciated against the dollar by about 5% in 2015. 


2.  The top 75 companies by market capitalization on the Nigerian Stock Exchange must have American Depository Receipts (ADR) on them at the New York Stock Exchange with a market maker in place.  Fungibility of shares must be allowed.  I can buy Zenith Bank in Nigeria and sell my position as an ADR in New York City and vice versa. This becomes a veritable way for people to source dollar and boost demand for Nigerian stocks at the same time. This second option creates a secondary outlet for dollar demand independent of the Central Bank of Nigeria.

I will stop here for now. I am trying to reduce the length of my articles for my own sake. (Smile)

Tell others to tell others about this blog; let us make this a home for facts and sober analyses of African markets, economies and companies.  Seek TRUTH: The Real Understanding of The Hegemon.  Truth will set us free; knowledge is power. 

Comments

  1. AnonymousJuly 28, 2015 at 6:38 AM

    Hi Jude,

    Thanks for the write up.

    Interesting but I have some problems with your thesis. Firstly, Nigeria's debt service to total budget is close to 25%. This reflects the rates paid out on NGN bonds which hover between 10-15% on average. If thesis is correct we should push it to 20% so where will debt service? Our budget will now tilt more towards debt and given that recurrent is heavy almost nothing for capital projects. On your second proscription again its interesting but I believe this should be optional not mandatory.

    More importantly, I think we have a strong naira obsession in Nigeria because we are heavy on consumption. If we are interested in becoming a manufacturing giant, which we should as our population size means an import dependent country is infeasible, then a policy to increase naira weakness should be on the table.

    ReplyDelete

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