Currency substitution and dollarisation of the economy – matters arising (1)

It is without a doubt that the dwindling receipts from crude sales by Nigeria are having a significant negative impact on the cash flow of the country and also in particular on the ability of the Central Bank of Nigeria to defend the exchange rate of the naira.

To this end, various measures have recently been introduced by the CBN, which can be interpreted as a disguised form of capital control. One of these is the strident ap- peal which later culminated in a number of directives by the CBN regarding the use of foreign cur- rency as payment for goods and services in Nigeria.

First, the Central Bank by a press release issued on or about 8th April, 2015, titled ‘The use of foreign currency as a medium of exchange in Nigeria’, stated that it has observed that some institu- tions price their goods and services in foreign currencies and demand payment in foreign currency rather than the domestic currency, the naira. It went on to draw the at- tention of the general public to the provisions of Section 20 (1) of the Central Bank of Nigeria Act 2007 which states, inter alia, that “the currency notes issued by the Bank shall be legal tender in Nigeria… for the payment of any amount”.

It went further to posit that any person who contravenes the above quoted provision is guilty of an offence and shall be liable on conviction to a prescribed fine or six months imprisonment.

By a follow-up circular dated 9 June, 2015 addressed to all banks and titled ‘Currency Sub- stitution and Dollarization of the Economy’, the CBN indicated that the circular is issued to pro- vide clarification on provisions contained therein.

It goes on to clarify that (a) authorised dealers are to note that pricing of goods and services in Nigeria shall con- tinue to be in naira only and it is a criminal offence for any person or body corporate to refuse to ac- cept the naira as legal tender for payment for goods and services.

In addition, it goes on to exempt certain revenue-generating agen- cies and operators permitted by law and whose business transac- tions allow payments/receipts in foreign currency, e.g., FIRS, NPA, NIMASA, FAAN, operators in oil and gas including oil service companies, operators in maritime and aviation industry.

This opinion is written due to the confusion the various circulars and policy papers have fostered in the market including various interpre- tations of same by sellers of goods/ providers of services and their various customers as well as deposit money banks some of which have even threatened to stop domiciliary account holders from transferring funds in same. I will now seek to address the main issues.

First issue: Are all payments be- tween parties in Nigeria required to be made in naira? The answer is No.

The applica- ble laws – (i) the Central Bank Act 2007, (ii) the Foreign Exchange (Monitoring & Miscellaneous Pro- visions) Act Cap F34 Laws of the Federation of Nigeria 2004, and (iii) the Central Bank Foreign Exchange Manual (regulations) – do not re- strict the use of other currencies as a means of payment for goods and services within Nigeria.

As a matter of fact, Memorandum 16 of the CBN Manual (Remittance for Services Rendered in Nigeria to any Nigerian Resident) expressly allows payment in other currencies by parties (where so agreed), except that the funds cannot be sourced or obtained from the Central Bank sources such as the Retail Dutch Auction System (RDAS) and the interbank market (which is funded mainly from official sources).

Funds that can be used include funds in domiciliary accounts and from personal offshore sources.

The argument may be made that the proviso to Section 20 of the CBN Act – “Provided that the Bank shall have powers to prescribe the circumstances and conditions under which other currencies may be used as medium of exchange in Nigeria” – gives the Central Bank the powers to restrict the use of for- eign currencies for transactions in Nigeria.

Indeed, such an argument is plausible. However, it becomes necessary to read the proviso in the context of the entire Section 20.

The Section of the Act deals with the use of the naira as legal tender and prescribes punishment for refusal to accept same.

The Section does not restrict the use by agreement of parties of a different medium of exchange.

It also does not restrict the pricing or index-ing of goods and services to other currencies.

It would appear from a reading of the entire Section 20 that the intent of the proviso is to allow the Central Bank to pre- scribe a different legal tender in Nigeria other than the naira, such as was recently done in Zimbabwe following the catastrophic devalu- ation of its national currency.

Thus, the suggestion that pric- ing of goods and services in Nige- ria and payment for same must only be in naira appears not to reflect the correct position of the law.

If indeed such restrictions apply, then trade by barter would also be restricted since it is a form of payment for goods or services other than by naira.

Second issue: Can payees (e.g., landlords, schools, service provid- ers and sellers of goods) insist on payment in foreign currency? The answer to this is also No.

The position taken by the Central Bank on this issue is correct based on applicable laws and regula- tions.

DAYO O. IDOWU