Nduka Ikeyi, discusses the recent CBN’s directive on the use of foreign currencies for local transactions and notes that the directive is illegal as it runs contrary to the provisions of the CBN Monetary Policy Guidelines…
Early in April 2015, the Director, Corporate Communication in the Central Bank of Nigeria (CBN) issued a Press Release entitled “The Use of Foreign Currency as a Medium of Exchange in Nigeria”. Interestingly, The Press Release bears no date and no reference number. In the Press Release, the CBN would appear to decry the increasing use of “foreign currencies in the domestic economy as a medium of payment for goods and services”, and called the “attention of the general public” to the provisions of the CBN Act that “the currency notes issued by the Bank shall be legal tender in Nigeria … for the payment of any amount”. Further in the Press Release, the public is advised that any person who “contravenes this provision is guilty of an offence and shall be liable on conviction to a prescribed fine or six months imprisonment”; but that the “prohibition … is without prejudice to foreigners … who are encouraged to continue to use their cards for payments or exchange their foreign currency for local currency at any of the authorised dealers’ outpost”.
The content of the Press Release would seem to be informed by section 20 of the Central Bank of Nigeria (Establishment) Act (CBN Act), which provides in sub-sections (1) and (5) that –
(1) The currency notes issued by the Bank shall be legal tender in Nigeria at their face value for the payment of any amount.
(5) A person who refuses to accept the naira as a means or (sic) payment is guilty of an offence and liable on conviction to a fine of N50,000.00 or six months’ imprisonment:
Provided that the Bank shall have power to prescribe the circumstances and conditions under which other currencies may be used as a medium of exchange in Nigeria.
It would seem that it is in exercise of its power under the proviso to section 20 (5) of the CBN Act that the CBN had permitted the use of foreign currencies in domestic transactions in Nigeria starting, as far as I can recall, from 2004. In that year, the CBN Monetary, Credit, Foreign Trade And Exchange Policy Guidelines For Fiscal 2004/2005 in its paragraph 4.2.1(vi) provided that: “Payment in foreign exchange for products and services provided by a Nigerian company to another Nigerian company or subsidiaries shall not be allowed in the foreign exchange market. However, where the payer accepts to pay in foreign exchange, the funds shall be from his ordinary domiciliary account or offshore sources”. Curiously, paragraph 4.2.7(iii) of the same instrument absolutely prohibited the denomination of contracts made in Nigeria in any currency other than the Naira. However, the text of paragraph 4.2.7(iii) of the 2004/2005 Monetary Policy Circular had appeared as 4.2.8(iii) in the 2002 Monetary Policy Circular; and the 2002 instrument contained no provision similar to paragraph 4.2.1(vi) of the 2004/2005 instrument.
I had in an article published in the Journal of International Banking Law and Regulation in 2004 entitled “Understanding Nigeria’s Foreign Exchange Legislation through the Transactions”, highlighted the discord between paragraphs 4.2.1(vi) and 4.2.7(iii) of the 2004/2005 instrument, but nevertheless showed how both provisions could be read to apply together without conflict. Fortunately, the text of paragraph 4.2.7(iii) of the 2004/2005 Circular disappeared from subsequent CBN Monetary Policy Circular documents. The substance of the provision of paragraph 4.2.1(vi) of the 2004/2005 instrument has, however, survived to this day in paragraph 4.2.1(XI) of the CBN Monetary, Credit, Foreign Trade and Exchange Policy Guidelines For Fiscal Years 2014/2015 (CBN Monetary Policy Guideline 2014/2015),issued on 1 January 2014 and signed by the CBN Governor as follows:
“Payment for products and services provided in Nigeria by companies or individuals: Nigerians or foreigners, resident in Nigeria, shall not be made in foreign exchange. Where the beneficiary/payer accepts to settle in foreign currency, the funds shall be sourced from own domiciliary account and/or offshore sources and not through the foreign exchange market”.
Whilst it is doubtful that the Press Release and or the CBN Monetary Policy Guideline 2014/2015 would operate to take away the right of parties to a contract in Nigeria to choose a foreign currency as the currency of obligation (not the currency of payment) in their contract, the Press Release would seem to have removed the flexibility offered by the CBN Monetary Policy Guideline 2014/2015. In compliance with the Press Release, a payer has no option to agree to settle his payment obligation in foreign currency from his own foreign exchange sources. In particular, the Press Release would also seem to have abolished the right of hotel proprietors to charge foreign visitors in foreign currency (see paragraph 4.2.1(XIX) of the CBN Monetary Policy Guideline 2014/2015).
The critical question, however, is whether the Press Release is indeed able to override the provisions of the CBN Monetary Policy Guideline 2014/2015? I doubt that this is the case. CBN Monetary Policy Guideline 2014/2015 was signed by the Governor of the CBN, apparently exercising the powers of the CBN to (a) issue guidelines (see section 33(1) (b) of the CBN Act), and or (b) prescribe the circumstances under which other currencies may be used as a medium of exchange in Nigeria (see section 20(5) of the CBN Act). Hence, in the absence of any enabling statutory power, the undated Press Release issued by the Director, Corporate Communications of the CBN lacks legal or regulatory force and cannot amend the provisions of the CBN Monetary Policy Guideline or any other CBN Policy Circular document for that matter.
The Press Release seems to be a kneejerk reaction to the devaluation of the Naira to other foreign currencies, especially the wide margin between the interbank and the parallel market rates. However, there is no scientific proof that this is wholly or partially attributable to the operation of paragraph 4.2.1(XI) of the CBN Monetary, Credit, Foreign Trade and Exchange Policy Guidelines For Fiscal Years 2014/2015 (CBN Monetary Policy Guideline 2014/2015). If so, what problem is the CBN trying to solve? The appreciation of the Naira post-Presidential elections is not attributable to the Press Release, but the unexpected political stability attendant upon the outcome of the elections. The prohibition of access to the inter-bank foreign exchange market to settle domestic foreign currency obligation in the Guideline already provides enough safeguard against pressures on the foreign exchange market, hence those who have legitimately and independently sourced foreign currency should not be prevented from settling their obligations in that currency. It is a time-tested regulation (now 10 years old) that had encouraged transparency in foreign exchange transactions in Nigeria. Attempt to reverse it by the nugatory Press Release or any other means whatsoever will do more damage than good to Naira stability as it will drive up black market activities, which is not desirable. The CBN and other managers of the Nigerian economy should focus more on the honest implementation of sound economic policies, which would engender confidence in the Nigerian economy – and in the Naira.