As Nigeria battles with a crashing local currency and rising inflation, the International Monetary Fund (IMF) has cautioned that dollarisation is hard to revert.
The IMF gave the warning in a recently released report titled: “Digital Money and Central Banks Balance Sheet”.
In the report, the IMF noted that market participants tend to protect themselves by preferring to hold dollars under high and persistent inflation environments.
Nigeria’s worrisome dollarisation trend: The IMF also acknowledged that most economies operate with a dollar bias for international trade and finance invoicing. However, with the increasing pace of dollar scarcity and high inflation, dollarisation levels in Nigeria have become a concern.
Part of the report by the Washington-based multilateral lender said:
It’s hard to reverse a bi-monetary system: The IMF cautioned that dollarisation is difficult to reverse. The report explained:
It also limits the role of the exchange rate: The IMF report further noted that a bi-monetary system 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.
Nigeria’s forex and high inflation troubles: Nigeria’s inflation rate surged to 20.77% in September 2022, up from 20.52% recorded in the previous month. The food inflation rate in September 2022 was 23.34% yearly, marking an uptick from the 23.12% recorded last month.
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