The Central Bank of Nigeria (the “CBN”) has taken a number of extreme measures in recent months that effectively amount to capital control, all presumably intended to slow the decline in foreign reserves arising from the global drop in oil price.
One of these measures was to severely limit what Nigerian-based exporters are allowed to spend their foreign currency export revenue on. Another has been to declare it illegal for persons and businesses in Nigeria to price goods and services supplied in Nigeria in foreign currency.
Through a number of public statements, releases, letters and circulars, the CBN has correctly restated that the Naira is legal tender in Nigeria, but then declared (incorrectly, as would be shown in the rest of this article) that “it is illegal to price or denominate the cost of any product or service (Visible or Invisible) in any foreign currency in Nigeria and no business offer or acceptance should be consummated in Nigeria in any currency other than the Naira”.
In the circular from which the above quotation was taken, titled “Currency Substitution and Dollarisation of the Nigerian Economy” (dated 17 April, 2015 with reference No BSD/DIR/GEN/LAB/08/013) (the “Dollarisation Circular”), the CBN went further to direct that “deposit money banks operating in Nigeria are advised to desist from the collection of foreign currencies for payment of domestic transactions on behalf of their customers and the use of their customers’ domiciliary accounts for making payments for visible and invisible transactions (fees, charges, licences, etc.) originating and consummated in Nigeria”.
The Dollarisation Circular is further expressed to supersede “the provisions of Memorandum 16 of the Central Bank of Nigeria Foreign Exchange Manual [the ‘CBN Forex Manual’]”. That Memorandum had recognized the freedom of persons and businesses resident in Nigeria to choose to pay for local goods and services in foreign currency as long as they obtained the required foreign currency from sources outside the CBN-regulated foreign exchange market. By the provisions of the Dollarisation Circular, however, the CBN purports to have taken away this freedom.
A lot of concern has been expressed, mostly in banking and business circles, about the impact of the Dollarisation Circular on the implementation of transactions that predated the circular as well as on new and future transactions. How, for example, does the CBN expect two local parties who have entered into a long-term import-dependent supply or service contract to price that contract without reference to the foreign currency input?
In a more recent circular of the same title of “Currency Substitution and Dollarisation of the Nigerian Economy” (dated 21 May, 2015 with reference No BSD/DIR/GEN/LAB/08/024), the CBN restated that the “pricing of goods and services in Nigeria shall continue to be in Naira only and that it is a criminal offence as stipulated in Section 20(5) of the Central Bank of Nigeria Act, 2007 for any person or body corporate to refuse the acceptance of the Naira as the legal tender currency for payments for goods and services in Nigeria.”
A common feature of all of the above circulars and statements of the CBN on this subject has been to make heavy weather of the fact of the Naira being legal tender in Nigeria and effectively conclude that local transactions expressed or conducted in a currency other than the legal tender are for that reason illegal.
That thinking unfortunately completely misunderstands or at least misapplies the concept of legal tender and its implications on the freedom of contracting parties to elect their preferred medium of exchange.
As a matter of law, legal tender simply and squarely means such money as cannot legally be rejected locally in settlement of debts expressed in local currency. In relation to debts expressed in foreign currency but payable locally, the harshest impact that the concept of legal tender could have is that the debtor may have a general right of conversion to local currency. In other words, the debtor may either pay in the stated foreign currency (if he so chooses) or he may exercise his right of conversion and pay in the local currency equivalent and, given that the legal tender cannot legally be rejected, the creditor may be compelled to accept the local currency payment. (Charles Proctor, Mann on the Legal Aspect of Money [Sixth edition])
Although the CBN has never fully explained the legal basis for the steps it has taken to date on this subject, it is very likely that it has relied on a certain provision of the CBN Act that appears to give the CBN the power to prescribe when foreign currencies may be used in Nigeria.
This provision is to be found in the proviso to the penalty for the breach of the legal tender rule. By section 20(5) of the Act, it is provided that: “A person who refuses to accept the Naira as a means of payment is guilty of an offence and liable on conviction to a fine of N50,000 or 6 months imprisonment: 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.”
Chike Obianwu
