The domiciliary accounts and use of dollars as legal tender in Nigeria

Sat, Feb 3, 2024
By editor


By Prof. Frank Ozoh 

THE Central Bank of Nigeria, CBN, has released a set of guidelines to enable increased foreign exchange liquidity in circulation and checkmate destabilizing speculative demand for or hoarding of forex. 

In this regard, Deposit Money Banks (DMBs) engage in serious destabilising speculation by borrowing Naira and then converting it to forex to lend to customers. Also, CBDs hoard forex for the purpose of hedging and speculation through induced forex scarcity, leading to galloping  depreciation of the Naira vis-a-vis the rest of the world currencies. It has been suggested that DMBs control about 70% of the forex transactions in the nation’s private business activities. Therefore, by creating scarcity of the forex, destabilising speculation, and irrational hedging, the DMBs make huge profits in the post depreciation era of the Naira, particularly in the parallel market. Each period the CBN attempted to close the gap between the official and the parallel markets’ rates, sooner than later, the DMBs will repeat the same process, thereby worsening the exchange value of the Naira secularly. Inadvertently, the CBN has been funding the round- tripping activities of the MDBs and the BDCs. This further exacerbates speculative, hoarding, and hedging activities in the forex market.

For this reason, therefore, the CBN observed with concern the humongous build-up in forex exposures of the DMBs through their Net Open Position (NOP). To discourage DMBs from hoarding humongous amounts of forex for speculative and hoarding purposes in the longer period of time, the CBN issued some prudent guidelines to ensure that the challenges are put under control. 

In this regard, DMBs are required to keep only 20% of forex inflows with them and lend out 80% of it. For example, if DMDs receive, say, 100 million USD, then they will keep up an outflow of 80 million USD and may retain the amount not exceeding 20 million USD. By penalising humongous forex hoarding for a longer period of time, the CBN expects to curtail hedging and destabilising speculative ventures of the MDBs and BDCs between the parallel and the official market outlets. 

Furthermore,  the CBN would expect the DMBs to engage in the “neutrality of forex and hedging” by borrowing and lending in forex or in Naira within the very short or market period of time element. In this regard, DMBs will borrow and lend in Naira or borrow and lend in forex, thereby making hedging to appear neutral. 

As presented, this forex policy measure of the CBN may appear intuitive and plausible but a critical evaluation of it would expound its limitations, particularly when the Naira by our Constitution of 1999 (as altered) is the only legal tender. Allowing the USD or the UK Pounds to compete as legal tenders to be deposited and withdrawn over the counter at the DMBs is an illegality with a penalising impact on the Naira.

If the Naira can  not be nursed as a baby, be protected as a child, and be freed as an adult, then the essence of its legal tender is debilitated. In this regard, therefore, the current policy measure to stabilise the exchange value of the Naira is by business expectations playing the ostrich and kicking the can down the road. This is because of the overwhelming miscalculations and unrealistic assumptions of the forex policy measures of the CBN, particularly the floating of the Naira’s external value vis-a-vis the currencies of the rest of the world as a developing economy with a narrow range of primary -commodities-export basket whose better-terms-of-trade factor has secularly deteriorated. With the over dependence on oil export revenues, whose international prices and production quota are exogenously determined, whose import payments  outsized export receipts lead to the abduracy and fundamental disequilibrium in our balance of payments, with the present parallel market exchange value of the Naira put at N1,500/One USD and galloping inflationary gaps making a complete mess of the wage rate, something needs to be done, and that too, quickly. 


For rational policy measures, and because of the exigencies required to speedily ameliorate the immiserizing community welfare milieu, CBN forex policy measures must be rationalised into four time elements. This will be done so that in the very short term and short run, lives will be saved. 

A) THE CBN must do away with the Domiciliary Accounts, disallowing the over counter deposits and withdrawals of foreign currencies. By the Constitution of the Federal Republic of Nigeria (as altered), the Naira is the only legal tender. In this regard, the Naira must be treated like other domestic currencies of developing economies like in Kenya, South Africa, Ghana, Egypt, etc. We can not continue to treat the Naira differently and expect better results than in these countries. 

B) We must discontinue the importation and forex payments for goods and services that we have the state of art and technological knowledge to produce and are producing domestically in the short run.

C) We must promote real investments in import competitive, import replacement, and import substitution industries. This will create income, output, and employment by multiple times with consumption acceleration quotient and price stability. 

D) We must promote real investments in the diversification of the export basket. The nation will not only produce and export agrarian goods but diversify into production and exportation of manufactures with better terms of trade factor rewards in the medium and long terms. 

E) We must promote investments in key and basic industries like  iron and steel, cement, pharmaceuticals, etc. in the medium and long term.

F) We must promote key infrastructural facilities to reinforce investments, productivity, and business activities. These will include good transportation, roads, waterways, railways systems, electricity, irrigation, bridges, etc. in the medium and long term.

G) We must eliminating defective outlook of both the economic and the non-economic institutional setup. This may involve both long and secular periods of time. 

These measures, among others, could be adopted in both the short and long run to address the immediate and remote issues of the forex transactions vis-a-vis economic development and growth in Nigeria.

All said, the Domiciliary Accounts must go to allow the Naira to enjoy its legal tender status in Nigeria as in other countries. 

Prof. Frank Ozoh 

NILDS, Abuja.


-February 3, 2024 @ 18:21 GMT|