The Foreign Exchange Act and the Devaluation Debate

Nduka Ikeyi

In 1995 Nigeria took a bold step towards the liberalisation of cross-border capital flows. This step was marked with the enactment of two statutes, namely, the Nigerian Investment Promotion Commission Act (“NIPC Act”) and the Foreign Exchange (Monitoring & Miscellaneous Provisions) Act (the “Foreign Exchange Act”). The NIPC Act repealed the previous legislation that restricted foreign investment in Nigeria, thereby signaling a shift in policy away from the dependentistas approach to foreign investment regulation. The Foreign Exchange Act, on the other hand, provided a supplement to the NIPC Act in making detailed provisions regarding cross-border capital flows. It also repealed three statutes that hitherto constrained cross-border capital flows in Nigeria.

The thinking in some quarters is that the Foreign Exchange Act fully liberalised the market for foreign exchange (“forex”) in Nigeria. This view would seem justified given the attitude of the Central Bank of Nigeria (“CBN”) to asserting its power under the Foreign Exchange Act prior to 1999. However, based on a reading of the Foreign Exchange Act and the subsequent conduct of the CBN, it is also possibleto argue that the Foreign Exchange Act did not bring about a full liberalisation of the forex market in Nigeria. Post May 1999, the CBN would seem to have read too much into s. 1(2) of the Foreign Exchange Act, which gave it power to issue guidelines for “matters as may be deemed appropriate for the effective operation of the Market”, as well as s. 11(a), which provides that “[n]othing in this Act shall be construed – [(a)] as permitting any unrestrained or general dealing in foreign currencies on terms inconsistent with the provisions of this Act”.

The Foreign Exchange Act created the Autonomous Foreign Exchange Market (“Afem”) where transactions in forex are conducted (s. 1(1)). The Afem is defined as a market in which authorised dealers, authorised buyers, forex end-users and the CBN are participants, and may include other participants that the federal government may recognise (s. 41). Section 4 of the Foreign Exchange Act enacts the sources of forex which may be traded in the Afem, namely (i) forex in domiciliary accounts maintained in Nigerian banks, (ii) forex held or imported into Nigeria by Nigerian nationals resident in Nigeria or in the Diaspora and foreigners, (iii) export proceeds from both visible and invisible trade, excluding oil export proceeds (but various CBN circulars would seem to have brought oil export proceeds into the Afem), (iv) forex imported or held by foreign missions and international organisations, (v) forex held in external accounts by Nigerians, (vi) forex imported for direct investment in Nigeria, (vii) forex provided by the CBN, and (viii) forex from other sources as the Minister of Finance (the “Minister”) may specify by order published in the gazette. What the foregoing list shows is that the CBN is just one source of forex that is traded in the Afem – but as of today a prevailing source.

Transactions in the Afem are conducted between (a) members of the public and authorised dealers, (b) authorised dealers, and (c) authorised dealers and authorised buyers (s. 7). Authorised dealer means any bank or other entity licensed by the CBN and issued with a licence to deal in forex, whilst authorised buyer means any bureau de change, hotel or other corporate body appointed by the CBN. Instructively, Foreign Exchange Act expressly provides that the rate at which each transaction in the Afem is to be executed shall be the rate mutually agreed between the applicant purchaser and the authorised dealer or authorised buyer concerned (Foreign Exchange Act, s. 9).

Section 9 of the Foreign Exchange Act is relevant to the current debate about whether or not to “devalue” the Naira, especially as it relates to addressing the adverse effect that the failure to officially devalue the Naira has had on the inflow of the much-needed foreign investment into Nigeria. The view that has been put forward in this regard is that the CBN needs to devalue the Naira to reflect its realistic market value before foreign investors would resume investing in Nigeria as seen pre-2014. It is said that the Naira is already effectively devalued (or more appropriately has depreciated) given its parallel market value of approximately USD1/N320; and that if the foreign investor’s forex inflow is converted at the CBN official rate (now approximately USD1/N199), the investor would make a loss of at least N100 on every USD1 when he begins to incur expenditure in Nigeria in the course of his business operations, the cost of which is reflective of both the depreciation in the value of the Naira in the parallel market and inflation. The investor therefore needs to be able to convert his forex inflow to Naira at the realistic (parallel) market rate if he is to bring in forex to make investment in Nigeria. Although this argument has been presented here in its simplistic formulation, it nevertheless demonstrates the challenge, which manifests in various sophisticated forms.

Section 15 of the Foreign Exchange Act requires an authorised dealer through which forex is imported for the purpose of making investment in Nigeria to convert the forex into Naira in the Afem in accordance with the provisions of the Foreign Exchange Act. The authorised dealer is also required to issue a certificate of capital importation to the investor within 24 hours of importation of the forex. The question then is whether the Foreign Exchange Act requires the authorised dealer to convert the forex at the CBN official rate, which is the concern of foreign investors, and for that matter, the local company in which the investment is made. I will answer this question very quickly in the negative by reference to s. 9 of the Foreign Exchange Act, which gives parties transacting in the Afem the right to execute transactions at a rate mutually agreed “by the applicant purchaser and the authorised dealer”. In this case the applicant purchaser is the foreign investor (or any other member of the public for that matter) who is purchasing Naira in exchange for his forex, whilst the bank through which the forex is imported is the authorised dealer. Section 9 of the Foreign Exchange Act is not made subject to any other provision of the Foreign Exchange Act, and no other section of the Foreign Exchange Act contains provisions that are in conflict with s. 9. Indeed, although s. 16 of the Central Bank Act (“CBN Act”) empowers the CBN to devise a suitable mechanism for determining the exchange rate of the Naira, there is no provision in the Foreign Exchange Act, which is specific to transactions in the Afem, that permits the CBN to set the rate at which forex transactions in the Afem are to be executed in a manner that binds every transaction in the Afem. Further, s. 37(2) of the Foreign Exchange Act provides that the provisions of the Foreign Exchange Act shall prevail over the provision of any other law that is inconsistent with the Foreign Exchange Act.

The CBN may nevertheless be able to influence the rate at which transactions are executed at the Afem by agreeing rates with regard to the forex that it supplies to the Afem, which are lower than the rates agreed by other suppliers of forex to the market. And the effect of this intervention would depend on the proportion of the forex supplied to the Afem by the CBN relative to the total forex supply to, and demand for forex in, the market. If the CBN’s forex supply is equal to or exceeds the demand for forex in the market, then the CBN rate would be the effective market rate as no sensible dealer would buy forex from a source the price of which is higher than the price the CBN is willing to take for the same. Indeed at this point, some forex suppliers may have to offer rates lower than the CBN rate to be able to sell their forex.

The present challenge in the Afem is caused by (a) CBN’s forex supply being less than the demand for forex in the market, and (b) CBN’s imposition of its price on all transactions in the Afem. Given that there is no warrant in law for the CBN imposition of price on all transactions in the market, such an action is unlawful. Even the power of the Minister in the Foreign Exchange Act to issue directives for the efficient operation of the Afem only enables the Minister to issue directives that are “not inconsistent with the Foreign Exchange Act” (ss. 8(2) and 40). It is also an elementary principle of law that the power to make subsidiary legislation cannot be exercised in excess of the power granted therefor by (or inconsistent with the substantive provisions of) the principal and enabling statute. Any circular, guideline, or directive contrary to s. 9 of the Foreign Exchange Act is therefore ultra vires the Minister and or the CBN, and therefore unlawful and void.

But is the CBN free to set the price at which it may sell the forex it supplies to the market from time to time? I have no doubt at all that s. 9 of the Foreign Exchange Act enables the CBN to do so. Does the CBN have the right to determine who it will sell its forex to? I also have no doubt that it has the right to do so. The CBN (or the federal government) may therefore determine the transactions in respect of which it is prepared to bring forex into Afem and the price at which it will sell its forex to parties involved in these transactions. These transactions may perhaps be limited to transactions that are critical to the federal government’s economic diversification policy, with safeguards to ensure that they do not come back into the Afem to be sold at a different rate.

Using the current scenario, the effect of the application of s. 9 of the Foreign Exchange Act would be that the CBN would sell its forex to qualifying purchasers at its (official) rate , whilst other suppliers of forex to the Afem (including foreign investors) would sell their forex at a market determined rate (now approximately N320/USD1). But I can speculate that the latter rate, being a rate that has remained stable for some time now on the basis of a more or less fixed (under) supply of forex to the market over the period, is likely to improve in favour of the Naira, if compliance with s. 9 of the Foreign Exchange Act by the CBN leads to an increase in the supply of forex to the Afem by foreign investors and other sources. The debate about the devaluation or non-devaluation of the Naira would have become less significant; and the thought and time expended on it by well-meaning Nigerians and our foreign friends would become available for other important and urgent national issues.

– Ikeyi, a former Attorney general & Commissioner for Justice in Enugu State, is a partner at Ikeyi&Arifayan, Lagos