As a country dependent on oil revenues for the bulk of its foreign exchange, Nigeria has long imposed foreign exchange controls.1 Thus, the buoyancy of Nigerian foreign exchange reserves has largely depended on the price of oil. During the oil boom, reserves were at a high. However, the current slump in oil prices has seen the country's reserves dwindle to record lows (for further details please see "Implications of record drop in value of naira").
As Nigeria is dependent on oil, it must control the movement of foreign currency in and out of the country. At present, when a person leaves or enters Nigeria, he or she can carry up to $10,000 or its equivalent without making a declaration to Customs. Any currency in excess of $10,000 or its equivalent must be declared to Customs.
In a bid to control the use of foreign exchange, in an August 5 2015 circular the Central Bank of Nigeria (CBN) prohibited deposit money banks from accepting foreign currency cash deposits, as they already held high volumes of foreign currency. According to the circular, account holders could withdraw in cash either the foreign currency or its equivalent in naira. The transfer of foreign currency was permitted only to and from domiciliary accounts via wire transfer. Thus, foreign currency deposited in cash before the CBN circular could not be transferred from domiciliary bank accounts.
Alternatively, interested persons could obtain foreign currency through the purchase of the personal travel allowance or the business travel allowance, or for other legitimate purposes such as medical fees, mortgages, school fees, goods or credit card bills using Form A for invisible transactions or Form M for visible transactions.
This CBN action followed an April 15 2015 circular which reduced the annual limit on the use of naira debit cards abroad from $150,000 to $50,000 per person. In addition, the daily cash withdrawal limit from automated teller machines (ATMs) was set at $300.2
Foreign exchange obligations
Following the CBN circulars of April and August 2015, individuals and companies found it hard to meet their foreign exchange obligations. Many experienced difficulties, as the previous system of buying foreign exchange from the autonomous foreign exchange market, depositing it in domiciliary accounts in deposit money banks and transferring it offshore was no longer operational.
The circulars resulted in less foreign exchange flowing through the system. Individuals and companies resorted to buying transfers into their domiciliary accounts, which came at a premium due to the scarcity of foreign exchange. This allowed them to transfer foreign exchange offshore to meet their foreign currency obligations. The personal travel allowance is capped at $4,000 and the business travel allowance is capped at $5,000, with both available for purchase once a quarter. The two allowances cannot be purchased simultaneously and are both available at the official CBN exchange rate ($1 = N197).
As a result, by December 2015 the naira had tanked against the dollar and other foreign currencies on the parallel market.
The foreign currency exchange controls – particularly the restriction on foreign exchange cash deposits into domiciliary accounts, were heavily criticised. The deposit money banks also periodically reduced the limits on the use of naira debit cards abroad, hitting a low in December 2015, when different deposit money banks drastically reduced the limits. Some had limits of $10,000 a day for online transactions and $300 a day for point-of-sale use, while others reduced the limit to $500. Previously, deposit money banks had separate limits for ATM withdrawals (cash-based transactions) and online and point-of-sale use (non-cash based transactions). However, in December 2015 the limits for cash and non-cash based transactions were made inclusive.
The $300 daily limit meant that an individual's purchasing power was drastically reduced. The deposit money banks' action was due to the fact that they could not meet their own foreign currency obligations when customers used their naira cards to pay for goods and services abroad.
Relief came via a January 11 2016 CBN press release, through which the CBN lifted the ban on foreign currency cash deposits in domiciliary accounts in deposit money banks. In the same press release the CBN banned the sale of foreign exchange to bureau de change operators. All deposit money banks have since notified their customers of the change and informed them of the resumption of transfers of foreign exchange cash deposits, which are subject to a daily limit of $10,000.
As the national bank, the CBN has tried to defend the naira through the 70% drop in oil prices, keeping the exchange rate below $1 = N200. Ideally, Nigeria should diversify its economy to provide more avenues for foreign exchange, as oil prices have not been this low since 2003.