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Effect of Central Bank of Nigeria’s Circular Against Dollarization of the Nigerian Economy
The free fall of the naira against the United States Dollars (“dollar”) and other foreign currencies is giving many businesses in Nigeria sleepless nights. Most international businesses obtain their products abroad in dollars for sale in the Nigerian market for a profit.
These businesses peg the selling price for their products in dollars or the foreign currency in which they bought their products. However, the fluctuating conversion rate of naira against the dollars and other foreign currencies have made many businesses to run at a loss instead of making profits. This has caused businesses who cannot survive the tide to fold up.
This circumstance is made even worse by the provision of Section 15 of the Central Bank of Nigeria (Establishment) Act, 2007 (“the CBN Act”) which makes naira the only legal tender for carrying out business transactions in Nigeria. Section 20 (5) of the CBN Act provides that it is an offence for businesses to refuse to accept naira as a means of payment in Nigeria.
The Central Bank of Nigeria (“CBN”) in its Circular BSD/DIR/GEN/LAB/08/013 “Currency Substitution and Dollarization of the Nigerian Economy” of 17th April 2015, condemned currency substitution and dollarization of the Nigerian economy and warned the general public against the illegal pricing and denominating the cost of any product or service whether visible or invisible in any foreign currency other than the naira.
CBN advised commercial banks against collecting foreign currencies for payment for domestic transactions or use their customer’s domiciliary account for making payments for transactions originating and consummated in Nigeria. This is why commercial banks in Nigeria have stringent measures against transfers of foreign currencies.
The CBN in its Circular Ref: FMD/DIR.CIR/GEN/08007 “Establishment of the Investors & Exporters FX Window” of 21st April 2017 created a special window for investors, exporters and end users to improve liquidity in the foreign exchange market and ensure timely settlement of eligible transactions. This has been a welcome development.
However, in spite of CBN’s role in moderating the exchange rate in the window, the foreign exchange market in Nigeria continually faces short supply of foreign exchange to meet the rising demand. This has made the gap between the exchange rates in various markets to keep expanding at an alarming rate.
It is without doubt that CBN did not critically consider the interest of business owners who require foreign exchange to survive in business while making its Circular against the use of foreign currencies as a legal tender for business transactions in Nigeria.
How does the CBN expect businesses who bought products in foreign currencies for sale in Nigeria to make profit in light of its policies against payment in foreign currencies and the fluctuating rate of naira against the dollars and other foreign currencies? How would local partners who entered into an Agreement in a foreign currency for a long term before the publication of the Circular cope in light of present realities?
Interestingly, the CBN Circular prohibits payment for products and transactions consummated in Nigeria in any foreign currency. It does not prevent parties to an Agreement from benchmarking the prices of their products or an amount to be paid at a due date based on the conversion rate of dollars to naira at an agreed market rate on the date such payment is due.
It is therefore legal for businesses to peg the price of their products at the naira equivalent of dollars or other foreign currencies to naira at a conversion rate of an agreed market on the date when the payment becomes due. This is the only way for businesses to stay afloat in the current circumstances.
The dollarization of the Nigerian economy cannot be prevented by mere legislation against it. The only way in which the influence of dollars and other foreign currencies can be reduced in the Nigerian market and economy is when most of the products in the Nigerian market are manufactured in Nigeria.
Hence, the Nigerian State should take steps to make relevant policies and create an enabling business climate to enable more production of goods and services in Nigeria. The Nigerian economy must find a way to use its large market to attract foreign investments. This is the only reasonable way in which the naira can appreciate and compete favorably with other foreign currencies in the Nigerian economy.