…Why it cannot be converted into Naira by CBN
Nigeria has an estimated $16 billion in domiciliary accounts of commercial and merchant banks, data from the Central Bank of Nigeria reveals. We assumed an official exchange rate of N410/$ based on NAFEX rate used at the Investor and Exporter window.
According to data contained in the apex bank’s statistical bulletin, Nigeria had a total domiciliary account balance of N6.566 trillion as of March 2021 which when converted to dollars at the official rate of N410/$1, translates to about $16 billion.
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A further breakdown of the amount reveals corporates own about N4.478 trillion ($11 billion), while retail depositors own about N1.798 trillion ($4.38 billion). The balance is owned by states and local governments and other public institutions.
Foreign Currency Deposits. Exch rate used N360/$1 Jan 2020 – July 2020, N385/$1 Aug-Nov 2020, M410/$1 from December 2020-March 2021.
Why this matters
Nigeria’s foreign currency balances in commercial banks has become a topic of discussion in several quarters with some calling for a conversion of the balances into naira to shore up Nigeria’s dollar reserves. On the flipside, depositors are worried stiff about any such move even though the apex bank has come out to deny it categorically. Much of the discussion has revolved around how robust our domiciliary account balances are and if it can address forex shortages.
Most recently, House of Reps member, Ibrahim Obanikoro, representing Eti-Osa Federal Constituency, Lagos State, called on the Central Bank of Nigeria to close all domiciliary accounts for the next 12 months to ease the slide of the naira. Obanikoro stated this in an online statement on Tuesday evening, adding that he has come up with a bill that will serve the common good.
“I am not the CBN Governor but at this moment, I’m of the opinion that CBN should mandate that all dom accounts be closed for the next 12 months. Let’s see the effect on the Naira. After all, you can’t go to any of the Western worlds and open a foreign currency account.” Obanikoro suggested.
His remarks have been met with harsh criticism with some pointing to a lack of knowledge about currency matters.
This is not the first time Nigerians are experiencing palpable fears of a possible conversion of domiciliary accounts into naira, dating as far back as 2016 when we last had a currency crisis. Last year, a purportedly leaked memo suggested plans to curb usage of money in domiciliary accounts, however, this was categorically denied.
The rumours swelled again in late July, forcing the CBN to deny any such plans in a memo issued by its director of corporate communications. Again, in September of this year, a fake memo appeared with the insinuation that the central bank had approved the conversion of deposits in domiciliary accounts into naira. The Central Bank issued a press release categorically denying this.
See excerpts of the memo for clarity.
“The attention of the Central Bank of Nigeria (CBN) has been drawn to a fake circulation, in social media circles, of a circular with a fake CBN logo curiously dated “13 September 2021”, and purportedly issued by its Trade and Exchange Department to the effect that all Deposit Money Banks, International Money Transfer Operators (IMTOs) and members of the public are to convert domiciliary account holdings into naira. We wish to reiterate that the Bank has not contemplated, and will never contemplate, any such line of action. The speculation is a completely false narrative aimed at triggering panic in the foreign exchange market,” the CBN stated.
Read the rest of the memo here
Facts versus Fiction
At just $16 billion, the above balances suggest Nigeria’s domiciliary account balances are not robust enough to meet Nigeria’s foreign exchange demand shortages which Nairametrics estimates at about $30 billion.
- Nairametrics also believes deposits in domiciliary accounts already forms part of FX liquidity for banks and cannot again be a new source of forex for the central bank.
- In addition, retail deposits of just $4.3 billion will not move the needle even if the apex bank is tempted to want to seek liquidity from customer deposits, assuming banks do not include it in their source for funding FX purchases.
- Surely, if everyone were to ask their banks to sell their dollars, it will have a positive effect on the exchange rate, but this is not how the market works. Deposits are available for banks to use in the most efficient manner and this inadvertently affects forex liquidity.
- Another strong reason that suggests a conversion cannot materialize is that about 68.5% ($11 billion) of the total deposits belong to corporates who earn this money from their foreign currency earnings, through capital importation or loans in form of external credit.
- The CBN cannot then tap into these balances as a new source of forex inflow or liquidity when it already serves the same purpose.
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