Dec 8, 2016

Anti-Dollarization Policy: Managing Reality – Issues And Discontents

*This article, co- written with Chuks Okoriekwe, was featured in the Legal Insight column of BDLaw (Legal Section of the influential daily, BusinessDay) of 08 December 2016.


The Central Bank of Nigeria (CBN) in its effort to starve off the pressure on the Nigerian currency had drawn the attention of the public to its Currency Substitution and Dollarization of the Nigerian Currency Circular issued on 17th day April 2015 (the Circular). The Circular essentially leveraged existing legislative provisions to reiterate the bar against denomination and pricing of local (visible and invisible) transactions in any foreign currency.

The Circular has spurred series of questions on the minds of Nigerian who reside in highbrow areas of Lagos and Abuja where rents, school fees and payment for other social amenities are made in foreign currency, especially United States Dollars (USD). These residents in the wake of the reminder now question the validity of contracts entered with several landowners and service providers (together “payees”) on settlement of their local obligations in USD; the residents insist that such contracts are invalid. Prospective residents and/or clients argue –and rightly so, it appears- that the contracts are contrary to the Circular and insists on Naira payment.

In the light of this, can Nigerian residents continue to make payment for local transactions in USD? If payors are reluctant, can payees insist on payment in USD? The key components of the regulatory framework are the Foreign Exchange (Monitoring & Miscellaneous Provisions) Act (Forex Act), Central Bank of Nigeria Act (CBN Act), the Circular, Revised Guidelines for the Operation of the Nigerian Inter-Bank Foreign Exchange Market (the Guidelines), and case laws. 


In the Circular, the CBN frowned at the trend of currency substitution and dollarization. It emphasized that Naira remains the only legal tender in Nigeria. The Circular reminded banks and other operators of sections 15 and 20, CBN Act which state that the unit of currency in Nigeria shall be the Naira.
The CBN further reiterated that it is illegal and an offence to price or denominate the cost of any product or service (visible or invisible) in any other foreign currency. It warned that no business offer or acceptance (with the exception of businesses in the oil and gas industry, maritime, aviation, operators in the free trade zone and selected government agencies) should be consummated in Nigeria in any currency other than the Naira. The Circular clearly stated that its provisions supersedes the provisions of CBN’s Memorandum 16 of the Foreign Exchange Manual and Paragraph (XI) Section 4.2.1, of the Monetary, Credit, Foreign Trade and Exchange Policy Guidelines for Fiscal Years 2014/2015. These moves were geared towards preventing full dollarization of the Nigerian economy as witnessed in Zimbabwe and Liberia. The impact of a full dollarized economy is that the country losses it national pride; the foreign currency will be favored more than the local currency; the Central Bank of such country losses grip of the monetary policies and high impact decisions on the economy are taken in the country whose currency is being used.


The Circular is contrary to, and may appear to be of no effect in the face of section 22 Forex Act which provides that “notwithstanding anything to the contrary contained in any enactment or law and except as provided in subsection (2) of this section, no person shall, in Nigeria, make or accept cash payment, whether denominated in foreign currency or not, for the purchase or acquisition (a) landed properties (b) securities, including stocks, shares, debenture and all forms of negotiable instruments; and (c) motor cars, including other vehicles of any description whatsoever”. The section further provides that “payments for the aforementioned items shall, as from the commencement of the Act, be made by means of bank transfers or cheques drawn on banks in Nigeria only. (Emphasis supplied). The implication of the use of the word “notwithstanding” is that the provision supersedes any conflicting provision on the same subject matter. The Supreme Court in Nigeria Deposit Insurance Corporation v. Okem [2004] 10 NWLR (Pt.880), 107 at 182, held that: “when the term ‘notwithstanding’ is used in a section of a statute, it is meant to exclude an impinging or impeding effect of any other provision of the statute or section so that the said section may fulfil itself.” 

A careful reading of the above provision suggests that in the case of land – lease or assignment (and other categories listed above), the lessee/assignee can, based on the Forex Act provision, make USD payment through bank transfer or cheques. The subsection only prohibits cash payments; once cash is not involved, then the parties, arguably, have not violated the provisions of the Circular? It could therefore be possible for the Parties (subject to risk appetite of the counterparty), to agree a Naira amount in a lease agreement with the understanding that USD equivalent be wired to the lessor’s domiciliary account. It appears the use of foreign currency for local transaction is further supported by the tax laws that require payment and accounting for taxes in the currency of the relevant transaction, for example VAT and withholding tax. 

It however gets more interesting! Although the argument above is plausible and takes advantage of the lacuna in Forex Act; the CBN Act (and the Circular) appears to have plugged the exposure. The Circular mandated, with penal consequences, that Deposit Money Banks (DMBs) should desist from collecting foreign currencies for payment of domestic transactions on behalf of their customers and the use of customers’ domiciliary accounts for making payments for transactions originated and consummated in Nigeria. Thus, pursuant to the CBN Act, payees are seemingly constrained in insisting on USD rents and other payments. In the face of what appears to be an inconsistency in the two federal legislation the question arises: Does the Forex Act supersede the CBN Act (the basis for the Circular) and vice versa?

There seems to be an apparent inconsistency/contradiction in the two principal legislations (CBN and Forex Acts) regulating forex in Nigeria. Whilst the CBN Act has stringent and prohibitory provisions, the Forex Act has a lacuna that could be utilized if legal analysis were to determine its supremacy in the event of conflict between the two laws. The question therefore is which of these two legislations will supersede? Two rules may be resorted to in resolving the conflict.

The first is that a subsequent legislation prevails over an earlier one. Secondly, specific legislation may prevail over a general legislation. For this purpose, the Forex Act is a specific legislation for forex transactions, whilst the CBN Act which primarily regulates banking, would be a general legislation with respect to forex transactions. It is arguable however that the CBN Act is also a specific legislation since it gives the CBN power to regulate the Nigerian currency. This may mean that the two legislation neutralize themselves on this point. 

Furthermore, in considering the general legislation vs. specific legislation rule, the supremacy provision of the Forex Act becomes irrelevant in the instant case because the CBN Act was later in time to the Forex Act. The irrelevance of the Forex Act is predicated on the fact that the legislator is presumed not to legislate in vain, and is presumed to have carefully considered existing legal provisions before enacting the later law, such that the later Act evidences legislative intention to amend the law through the express inconsistent provision with earlier Act. Axiomatically, where a special or private Act is absolutely inconsistent and repugnant with a subsequent general Act, the courts have a duty to declare the prior special or private Act or any of their provisions repealed by the subsequent general Act: Cowpact Disc Technologies Ltd & Ors. v. Musical Copyright Society of Nigeria Gtd. (MCSN) (2010) LPELR-CA/L/787/2008. Consequently, local forex transactions (unless exempted by CBN) would be caught by the prohibition pursuant to the CBN Act and subsidiary instruments, such as the Circular.

The CBN further reiterated its position in the Guidelines. Whilst introducing the OTC FX Futures financial product, the CBN indirectly reinstated in Guideline 2.2.1 that Naira is the only acceptable currency for transactions in Nigeria; this is a resounding way for the CBN to maintain its position. Although Futures transactions are hedged against the USD, the Guideline insists that at settlement of trade, the difference between the contract and spot price is paid in Naira. It is therefore apparent that payees may not continue to demand for USD denominated fees or rent, as the case may be, in the wake of the CBN Circular. Having determined payees’ position going forward, the issue of the validity of extant contracts entered into before the Circular, remains.

Whenever there is a change in law on a particular issue, such change affects existing (payment) obligations of contracting parties in the absence of any stabilisation or freezing clause in the agreement (stabilization or freezing clauses ensure that where economic situation or condition changes, the parties’ rights are not directly affected rather, terms are renegotiated to ensure economic equilibrium. It seems this clause, albeit common in oil and gas deals, is yet to come before Nigerian courts for determination). The Nigerian courts have however held that frustration of contract occurs where it is established to the satisfaction of the court that due to a subsequent change in circumstances which was clearly not in the contemplation of the parties, the contract is said to become impossible to perform: Diamond Bank Ltd. v. Ugochukwu [2008] 1 NWLR (Pt. 1067) 1 at 28. The Implication therefore is that the restatement by the Circular is tantamount to a change in circumstance thus the parties are obligated to renegotiate their contract in the local currency.

 In the American cases of Anderson v. Equitable Assurance Society of United States (1926) 134 LT 557 and British Bank for Foreign Trade Ltd v. Russian Commercial and Industrial Bank (1921) 38 TLR 65 it was held that performance of a payment obligation must be effected in whatever is considered legal tender at the time of performance (unless there is a stabilization clause). Flowing from this principle therefore, it appears that the CBN position in the Circular affects both existing and new transactions.

From the foregoing, although payees negotiated and entered into existing agreements with counterparties before the change, they may not be able to collect rent/other fees in USD in the face of the Circular. It will be illegal and an offence to denominate the rent payable either for the renewal or new lease in USD. 

Vietnam had a similar situation as Nigeria years back. In the wake of Vietnamese Ordinance on Foreign Exchange in 2005 (Ordinance No. 28/2005/PL-UBTVQH11) amended in 2013 (Ordinance No. 06/2013/UBTVQH13), the Vietnamese Courts were approached severally to determine whether parties can take advantage of USD denominated contracts. In one of such cases, the Vietnamese Supreme Court (Resolution No. 04/2003/NQ-HDTP), held that if an economic contract contains agreements on prices and payment in foreign currencies but parties are not allowed to make payment in foreign currencies, the contracting parties are allowed to make payment in Vietnamese Dong (VND) whilst using the foreign currencies as price-determining currency in order to stabilize the contracted value. 

The Vietnamese position appears to be similar to the situation in Nigeria. It therefore seems that payees can take advantage of the structure adopted in that country in determining whether it can reference the parallel market in its agreement. The query is whether the parallel market is recognized as a legal market in Nigeria? The parallel market, though not provided for under any existing local legislation in Nigeria, appears to be recognized; no law in existence appears to proscribe reference to the parallel market for USD access. Thus, although the market is not provided for, it is not illegal and at least the regulatory authorities have exhibited a “permissive” attitude towards its existence and operation. 

The “permissive” attitude of the authorities towards the parallel market was displayed in CBN’s comments following the introduction of the OTC FX Futures and other policies on forex. The CBN mentioned that one of the reasons for its policies and introduction of the financial product is to foster a convergence of the interbank and parallel market USD rates. Furthermore, Section 9 Forex Act seems to also recognize this market when it states that “the rate at which each transaction in the Market shall be executed shall be the rate mutually agreed between the applicant purchaser and the Authorised Dealer or Authorised Buyer concerned.”

In our view, since the parallel market adopts the price determination mechanism created by the Forex Act, it is not in breach of any extant legislation, but rather, appears to be recognized under the law. In any event, following the Vietnamese position above where their Supreme Court held that benchmarking contract amount in dollars is not illegal (albeit only a persuasive authority), it appears that payees can also reference the parallel market in their agreements.

We take the view that once the parties deal independently and at arm’s length, a reference to parallel market by parties in consummating their contract may be recognized. This position is based on the fact that parties commonly benchmark their contracts against the Nigeria Inter Bank Offer Rate (NIBOR) or the London Inter Bank Offer Rate (LIBOR). In the same way, parties can reference the parallel market in their contracts in order to hedge against currency fluctuations.

Associate at LeLaw Barristers & Solicitors

Tochukwu is admitted to the Nigerian Bar, and holds an LLM in Corporate, Finance and Securities laws from the New York University School of Law. Tochukwu has a strong interest for capital markets, securities transaction and finance, with an ardour for dispute resolution, both in the international and local sphere. Tochukwu is goal-driven, resourceful and a natural team player. Whilst Tochukwu's career interest is in international business law and transactions, he is also committed to worthy charitable courses, and has offered his assistance on a pro bono basis in certain cases.

Ed's Note - This article was originally published here