There are fears that the Central Bank of Nigeria (CBN) might use its financial powers to convert foreign currencies in domiciliary accounts to Naira as one of its desperate moves to stabilize the forex market.
Although, there was no statement to such a move by the apex bank, its recent action against the activity of the Burea De Change is raising more speculations among some players in the FX market.
Recall that CBN recently stopped sales of forex to BDCs operators over violations of forex on July 27, 2021. It rather diverted sales of FX to commercial banks and warned them to abide by the rules guiding forex. And research showed that banks are already obeying the order as pointed out in one of our articles at: https://infomediang.com/nigerian-banks-sell-us-dollar-for-n412
Is CBN Really Thinking of Sourcing Forex From Dom Account?
While the fears were on, the CBN through its Acting Director Corporate Communications, Osita Nwanisobi, debunked the report, stating that CBN doesn’t have such a plan, accusing speculators of devising ways of creating panic in the foreign exchange market.
On CBN’s action against BDC operators, he berated them for turning themselves into wholesale dealers dealing in forex to the tune of millions of dollars per transaction, “despite the fact that Nigeria is the only country in the world today where a central bank sells dollar directly to BDC operators.”
The bank maintains that it will closely monitor the activities of the commercial banks to ensure that the legitimate FX demands of customers are met, promising business owners to go about their business without worries while the apex bank continues to safeguard the value of the naira.
So…
Does CBN Have Powers To Convert Dollars In Domiciliary Accounts Into Naira?
Whether the CBN has such powers shouldn’t be a debate considering the CBN Act of 2007 of the Federal Republic of Nigeria.
The Act vested on the CBN with the overall control and administration of the monetary and financial sector policies of Nigeria’s Government.
Furthermore, the core functions of the apex bank among other roles include:
1) to ensure monetary and price stability including the inflow and outflow of foreign currency;
2) to maintain external reserves to safeguard the international value of the legal tender currency; and
3) to promote a sound financial system in Nigeria; and
4) to furnish the ruling government sound and resourceful economic and financial advice
Apart from the above Act, Act 1991 as amended also charged the CBN with the responsibility of administering the Banks and Other Financial Institutions (BOFI) which include: 1) the sole aim of ensuring high standards of banking practice and financial stability through its surveillance activities and 2) the promotion of an efficient payment system.
Specifically, operations of domiciliary accounts as enshrined under section 1 (ii) Memorandum 25 of Foreign Currency Domiciliary Accounts, states that:
“Foreign currency domiciliary accounts may be opened by Citizens of Nigeria, Foreign nationals and Foreign/indigenous companies.”
However, the manual was silent on the powers of CBN to convert forex in domiciliary accounts into the local currency.
Also, another update on the Operations Of Domiciliary Accounts signed by the Director Trade & Exchange Department Dr. O.S Nnaji in November 2020, states that the CBN has vastly improved capabilities to monitor transactions, forestall money laundering, and prevent the adverse effect of Dollarization in Nigeria’s economy.
As such, Nigeria’s apex bank has the powers to take actions it deemed fit would better the economy and put the Naira at a favourable advantage over other foreign currencies.
The implication of such action
But such action could invoke on Nigeria’s economy enormous damage as investors might lose confidence in the economy.
According to the Head of Research at Sigma Pensions, Wale Okunrinboye, believed that such action would bring on Nigeria a huge economic catastrophic, citing Argentina as the last country that undertook the same measure which led to the deterioration in its currency crisis.
Nairametrics, quoted him as saying that he didn’t believe that the CBN could be desperate to carry out such an action.
Final thought:
CBN has powers to take any financial and economic actions which it deems fit will reshape Nigeria’s economy to compete favourably among its pairs.
Its decision to convert foreign currencies in domiciliary accounts into Naira will put Nigeria on a catastrophic footing
Let’s believe it’s speculation as claimed by the official of the apex bank.