The International Monetary Fund (IMF) has pointed out that dollarisation, if left unchecked will remain an important challenge to policymakers in Nigeria and other African countries.
According to the multilateral agency, dollarisation constrains the capacity of monetary authorities to act as a lender of last resort, hampers banks’ liquidity management and weakens the stability of the financial sector.
The Fund also noted that dollarisation may amplify the impact of exchange rate movements on banks’ balance sheets, thereby increasing the risk of contractionary effects and bank failures. The IMF stated this in its 75-page report titled: “Dollarisation in Sub-Saharan Africa: Experience and Lessons.”
Dollarisation is a situation where the citizens of a country officially or unofficially use a foreign country’s currency as legal tender for conducting transactions. According to the IMF, dollarisation can complicate the implementation of economic policies through various channels as it would expose the balance sheets of the public sector, private enterprises, and households to exchange rate risks, when assets and liabilities in foreign currency are mismatched.
Furthermore, it noted that it also reduces the abilities of governments to issue medium-and long- term debt in domestic currency.