Fear rises over possible conversion of Dollars in domiciliary accounts into Naira

There is palpable concern that the Central Bank of Nigeria could consider converting dollars in domiciliary accounts of banks held on behalf of depositors into naira. This follows the recent ban on the sale of forex to the BDCs by the apex bank over accusations of fraud and arbitrage.

Several panelists who spoke on Bigwig FX’ OnTheMoney weekly economic and business roundtable discussion on popular app, ClubHouse session held last Saturday, were concerned that the arbitrary nature of CBN pronouncements could one day lead to an annexation of dollar deposits estimated at about $15 billion.

This is also based on concerns that the central bank might in an act of desperation choose to convert some of the balances to address Nigeria’s foreign currency supply shortages. Nigeria has earned less from oil in the last one year and is currently running on a massive revenue shortfall. External reserves have hovered around $33 billion in the last 3 months as foreign investors shun investing in the country. This, therefore, suggests that the central bank might consider this option to address the foreign exchange shortfalls.

However, panellists at the Bigwig FX ClubHouse session “OnTheMoney” allayed these concerns insisting that the CBN will not convert the dollars into naira. According to Wale Okunrinboye, head of research at Sigma Pensions, the last country that did this was Argentina and it resulted in a catastrophic deterioration in its currency crisis. He maintained that the central bank was not that desperate to carry out such an action. Another analyst who was on the show, Dele Akintola, opined this was not in any way under consideration and that the laws and regulations that guides ownership of domiciliary accounts cannot be changed easily by the Central Bank.

Both analysts opine that taking such a decision will portend immense political ramifications considering the significant role domiciliary accounts play in trust and confidence in the financial markets and banking sector. “Any such move will be swiftly rejected by the National Assembly,” Dele concludes.

What does the law say?

Currently, operations of domiciliary accounts are enshrined in the Central Bank’s Foreign Exchange Manual which was last updated on July 26th, 2018. Under Memorandum 25 of the manual titled Foreign Currency Domiciliary Accounts, the CBN sets out policies for operating a domiciliary account. Under section 1 (ii) Eligibility, the manual states that “Foreign currency domiciliary accounts may be opened by Citizens of Nigeria, Foreign nationals and Foreign/indigenous companies.” Nowhere in the manual does it actually state that the CBN has powers to convert it into naira or suggest it may consider doing so. In fact, according to the manual, the CBN is not interested in even knowing who operates these accounts, even though they can, should they want to.

“For the avoidance of doubt, the monetary authorities are only interested in aggregate movements in foreign currency domiciliary accounts. Consequently, monitoring of transactions will be in aggregate and impersonal terms. Authorized Dealers are, therefore, requested to ensure that names of individual account holders are not stated in the returns.”

It is also important to state that on two occasions last year, the CBN has had to make clarifications under the operations of domiciliary accounts, citing this manual. On February 24, 2020, it reminded Nigerians that domiciliary account holders cannot transfer more than $10,000 electronically if the inflow was a cash deposit. On November 30th 2020, it again explained that anyone with a domiciliary account funded from electronic/wire transfer “will be allowed unfettered and unrestricted use” of the funds for “eligible transactions” while cash lodgments will continue to be limited to $10,000. This means, if you received a wired transfer inflow of $100k into your domiciliary accounts then you can transfer $100k without restrictions.

But as stated earlier the central bank can decide to update the guidelines in the manual as it did in 2018. In fact, one of the changes made was amending the eligibility of Personal Travel Allowances “PTA” and Business Travel Allowances “BTA”. For example, it clarified that the definition of a quarter under the limits of PTA and BTA of $4,500 and $5,000 to mean January to March, April to June, July to September and October to December. It also stopped people who collect BTA from also collecting PTA which was possible in the prior FX Manual. Another change was limiting the age for accessing allowances to 18 years and above.

CBN’s power to change the manual

According to a research report from Banwo & Ighodalo, the powers of the CBN to amend the manual is enshrined in section 1(2) of the Foreign Exchange (Monitoring & Miscellaneous Provisions) Act, 1999 [Cap. F34, Laws of the Federation of Nigeria 2004] (“Forex Act”). However, the changes that can be made “from time to time” are “subject to the approval of the Minister of Finance, guidelines to regulate transactions in, and operations of, the Nigerian Foreign Exchange Market.”

This suggests changes as significant as converting dollars into naira cannot be approved without the Minister of Finance which by extension is the President. Whilst this does not completely dismiss any chances that this may happen someday, Bigwig FX Analysts does not believe this CBN will propose this line of action.



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