Section 20(5) of the CBN Act makes it illegal for any person to refuse to accept naira as means of payment for any goods or services in Nigeria. Upon conviction such a person is liable to six months imprisonment or a fine of N50,000.
Third issue: Can parties price goods and/or services in foreign currency?
This is the first leg of the CBN circular of 9th June, 2015. Under the said circular, the Central Bank directs all banks that “pricing of goods and services shall only be in naira” and goes on to link this statement with the penalty for refusal to accept naira as a means of payment. It is clear that the penalty under Section 20(5) of the CBN Act only applies to persons who refuse to accept naira as a means of payment, and does not in any way extend to pricing of goods and/or services in a currency other than the naira, particularly where the parties are in agreement.
Fourth issue: Exemptions under circular dated 9th June, 2015.
Even though the circular is an attempt by the Central Bank to correct any misunderstanding regarding the current policy, it appears to have created more confusion with the general description of the exempted market participants. The circular exempts certain government agencies as well as “operators in the oil and gas industry including oil service companies; operators in the maritime and aviation industries, and operators in the export processing free zones”. It is probably clear that reference to an ‘operator’ in an export processing free zone implies an entity licensed as a free zone enterprise by either the Nigerian Export Processing Zones Authority or the Oil and Gas Free Zone Authority. However, with regard to the reference to maritime, aviation and oil and gas operators, it is unclear how an ‘operator’ is to be determined. In the oil and gas industry, is this limited to upstream companies or does it extend to downstream companies (whose revenues are mainly in local currency) and does it also mean that retail or marketing companies can invoice for supply of diesel or refined products in foreign currencies? With regard to upstream companies and operators in the aviation and maritime industry, is this limited to the primary entity or does this extend to consultants and service providers. In addition, is the exemption limited to entities licensed by the Department of Petroleum Resources, Nigerian Civil Aviation Authority or NIMASA? More questions arise from the circular, which require further clarification.
It is this writer’s opinion that, based on the provisions of applicable laws, it appears the interpretation of the Central Bank in respect of the Central Bank Act with regard to pricing of goods and services is not reflective of the correct position of the law.
Fifth issue: Who determines the exchange rate?
If it is established that based on applicable laws, residents in Nigeria can price their goods and services in currencies other than the naira, it would appear that the real issue is the exchange rate where prices are indexed to the foreign currencies.
Under Section 16 of the CBN Act, the CBN determines the exchange rate from time to time, by a suitable mechanism devised by the CBN for that purpose. This was previously by the rates published in respect of the WDAS and later the RDAS. RDAS was a means by which the CBN effected a “managed floating exchange rate”. Most recently, Nigeria operated a band of +/- N5. Currently, the RDAS has been suspended leaving all transactions to be done at the interbank market. Effectively, this means that Nigeria now more or less operates a floating exchange rate system (driven by demand and supply). The CBN only intervenes in the interbank market from time to time to correct disruptions.
In view of the current market circumstances, it can be argued that the CBN no longer prescribes the exchange rate and that rates are now dependent on market forces. Therefore, parties may canvass for a rate equal to the interbank rate or a rate equal to the prevailing parallel market rate (which can be considered to be the private OTC rate).
Conclusion
The question may be asked as to why parties may wish to index their prices to a foreign currency, and the answer is quite clear that this is due to instability of the local currency and as a hedge against local inflation. Therefore, it is likely that a raging argument or debate will continue in respect of this matter.
It is necessary for the Central Bank to reconsider its position in light of applicable laws on this issue and also issue additional circulars/guidelines with a view to providing clarification on some of the issues raised in this article for the benefit of all the stakeholders.
Dayo O. Idowu
