Nigeria has maintained a liberalized foreign exchange market since the enactment of the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act in 1995. The Act established an autonomous foreign exchange market and guaranteed the unconditional transferability of capital in any convertible currency by end users. The objective was to enhance international trade, export of local goods and to drive import of foreign capital. (Sections 12, 13 and 15, Foreign Exchange Act). With the current foreign exchange crisis resulting in the shrinking supply of foreign exchange in a principally export-dependent economy, there have been calls for a review of the Act to enable the Central Bank of Nigeria (CBN) tighten foreign exchange regulations to tackle loopholes in the foreign exchange regime.

The Nigerian Law Reform Commission (the Commission) published a report in the second quarter of 2016 on proposed Reform of the Foreign Exchange Act (the Report) in which it canvassed for the introduction of foreign exchange control measures to prevent exploitation of the autonomous market, check money laundering, and strengthen the Nigerian economy. Whilst the plan to amend the Act has been hailed in many quarters, the introduction of capital controls in the proposed Amendment Bill (the Bill) has been heavily criticized by stakeholders.

This article considers, on the one hand, the potential impact of the control measures proposed by the Commission and potential issues that may arise on account of their implementation, and, on the other hand; alternative measures that may be employed by the CBN to sanitize the system without compromising the subsisting liberalized market.


The Commission noted in its Report that a review of the Act is necessary because of the current difficulty in regulating foreign exchange transactions in Nigeria. In particular, the Commission noted that the difficulty stems from the fact that the Act:

(i)    allows for unrestricted repatriation of foreign currency purchased from the autonomous market (a market in which the Authorised Dealers, Authorised Buyers, foreign exchange end-users and the Central Bank are participants);
(ii)    Prohibits, without any exception; the seizure, forfeiture, or expropriation of imported money, and
(iii)    requires imported foreign currency to be subject to declaration for statistical reasons only. (Commission Report, page 7).

We have considered below the substance of the proposed control measures, and the potential issues that may arise from their implementation:


To empower the CBN to impose restrictions or prohibition on repatriation of foreign currency when necessary to protect the Nigerian economy, the Commission proposed that:
(i)    the importation or exportation of foreign currency in excess of Five Thousand Dollars (USD 5000) should be subject to such terms and conditions as the CBN may deem appropriate (Commission Report, page 39); and

(ii)    the repatriation of funds sourced from the autonomous market should be subject to terms and conditions prescribed by the CBN from time to time. (Commission Report, page 40).

Whilst it is imperative that the regulator is empowered to implement policies to defend the economy, subjecting the repatriation of capital to uncertain terms and conditions may have unintended effects on the inflow and outflow of foreign capital into the country, leading to:

(i)    Risk of capital flight: This measure is likely to result in capital flight, as investors jostle to repatriate funds before the passage of the Bill, whilst other potential investors will be dissuaded from making investments in Nigeria to avoid having their investments expropriated or trapped in Nigeria on account of the uncertainty of policy.

(ii)    Significant decrease in foreign direct investments (FDI): The introduction of control measures has been known (in the several countries which have attempted to implement same) to result in a sharp decline in foreign investments inflow. In Malaysia, for instance, the introduction of controls in order to defend the ringgit, resulted in a 95% decrease in FDI inflow between 1998 and 2001. (ftp://ftp.repec.org)

(iii)    Uncertainty in regulations: Subjecting repatriation of capital to terms made periodically by the CBN creates uncertainty in regulation, which could potentially reduce investors’ confidence in Nigeria’s regulatory regime and erode the Federal Government’s ongoing investment promotions efforts.

(iv)    Difficulty in accessing foreign debt: A country with capital control measures on outflows will find it difficult to access foreign debt, leaving local businesses solely at the whims of local lenders. This is because foreign lenders may be unable to see a clear line of sight as to how loans granted to local entities will be repaid.


Currently, the exchange rate at the autonomous market is determined by market forces (demand and supply), making it prone to exploitation and arbitrage. To prevent manipulation of market forces and boost liquidity, the Commission has proposed that:

(i)    the possession of foreign currency by any person without depositing it in a domiciliary account within thirty (30) days of its acquisition should constitute an offence; liable on conviction to two years’ imprisonment or to a fine of 20% of the amount of the foreign currency involved. (Commission Report, page 38).

(ii)    any person who fails to offer for sale to an authorised dealer (at the price it was sold to him or such other price as the CBN may determine), within thirty (30) days all or some of the portion of foreign currency which is no longer required for the purpose(s) stated in his application, commits an offence and shall be liable on conviction to two years’ imprisonment or to a fine of 20% of the amount of the foreign currency involved. (Commission Report, page 39).

(iii)    any authorised dealer or buyer who creates any form of monopoly or hoards foreign currency to influence the rate in the foreign exchange market commits an offence punishable with a fine of Five Million Naira (NGN 5, 000,000. 00).

The attempt of the Commission to criminalize market manipulation and arbitrage, though genuine and well-founded, is likely to result in:

(i)    Circumvention of regulations: Whilst the Bill seems to cater to several compliance requirements, minimal attention seems to have been paid to the modalities for implementation and enforcement. Lessons from countries that have imposed controls reveals it may be difficult to enforce controls. As witnessed in India and China (https://www.quora.com ), the introduction of controls leads to the growth of black market tactics aimed at circumventing regulatory measures.

(ii)    Ambiguity in the scope of the proposed Capital Control: The Commission has not set a threshold for the quantity of foreign currency that may not be retained beyond the thirty (30) days prescribed in the Bill. To criminalize the possession of any amount of foreign currency beyond thirty (30) days will be far reaching and practically impossible to enforce. Furthermore, the terms “hoarding” and “monopoly” were not defined and no parameters set for determining what will qualify as “hoarding” or “monopoly”.

(iii)    Difficulty in accessing foreign currency after deposit: The Commission also failed to outline a clear path for customers to access their funds when needed in the same currency in which it was deposited, or guarantee that such deposits will not be depleted by frivolous bank charges.


Whilst the Capital Control measures proposed by the Commission may, in the short term; appear to increase the country’s foreign reserves, facilitate the independence of Nigeria’s monetary policy, and reduce the foreign exchange rate pressures, they are not sustainable on the long run and may also have devastating effects on the ongoing efforts of the Government to enhance the capacity of our real sectors, facilitate international trade relations and promote inflow of foreign capital. It is therefore, advised that the Commission and the CBN focus on policies that will have a more positive and sustainable impact on our distressed economy, such as those recommended below:

(i)    Harmonization of Nigeria’s fiscal and monetary policies to achieve an export-oriented economy: The regulatory agencies, particularly the CBN and the Ministry of Finance, should collaborate to ensure that fiscal and monetary policies are harmonised towards achieving one core objective – an economy that is not import-dependent. Amongst others, it will be necessary to introduce tax incentives that would encourage local manufacturing and incentivize exports. A diversified export-based economy will increase foreign exchange earnings, and insulate Nigeria from any shocks in oil prices.

(ii)    Elimination of the parallel market: It is recommended that short-term policies geared at allowing the naira to float freely and eliminating the wide arbitrage between the official rate of the dollar and the parallel market rate (currently estimated to be north of N180), should be in place..

(iii)    Increase in use of foreign currency for local transactions (dollarization) :  Dollarization or currency substitution is the use of a foreign currency in parallel to or instead of the  domestic currency of a country. Given that Nigeria’s budget is currently benchmarked against the price of the crude oil, which is traded in dollars, and a lot of export-oriented businesses trade in dollars; increase in local use of dollars potentially offers more benefits. Benefits that may be derived from dollarization includes (a) reduced transaction costs of trade (b) mitigation of foreign exchange risk for foreign loans (c) boost in foreign exchange supply due to improved inflow (d) retention of foreign exchange in the banking system (e) reduced capital flight (f) mitigation of exchange rate fluctuations risk, and (g) a stable monetary and exchange rate policy.

(iv)    Introduction of interest earning domiciliary accounts: The CBN can encourage the deposit of foreign currency by introducing interest earning domiciliary accounts, with a guarantee that funds will be made available on request in the currency in which it was deposited. This will incentivise persons holding capital outside the financial system to deposit them with licenced financial institutions, thereby boosting liquidity.

(v)    Audit report on foreign exchange transactions in Nigeria: To promote transparency in the foreign exchange market, there should be established a periodic long form audit report system on foreign exchange transactions in Nigeria under which the CBN will audit transactions of authorized dealers.

(vi)    Enactment of anti-trust and anti-monopoly legislation: Enactment of an anti-trust and anti-monopoly legislation, which is long overdue in Nigeria, will ensure a transparent and competitive market; whilst also preventing unfair and abusive business practices.


Though there is a pressing need to overhaul Nigeria’s foreign exchange legislation, the much-sought succour to the challenges is unlikely to be achieved through capital controls. Controls as proposed will only scare off foreign investors, disconcert locals and further promote black market dealings. Alternative long-term measures, such as those proposed above should, therefore, be considered.