Why seizing dollars in domiciliary accounts would harm Nigeria

The Central Bank of Nigeria on Saturday denied a report that the federal government was considering seizing foreign exchange deposits in Nigerians’ domiciliary accounts, and forcefully converting them to naira as a way to address the severe dollar shortage in the country.

The Punch said its story was adequately sourced. Nonetheless, the paper pulled the report on Monday amid apprehension amongst Nigerians who feared they may lose their dollar reserves in domiciliary accounts.

While the bank has denied these rumours, analyzing the potential consequences highlights why such a policy would be incredibly dangerous for the country.

Here’s why seizing forex would be disastrous:

Loss of Trust and Capital Flight:

• Forcing citizens to give up their hard-earned forex would shatter trust in the financial system. People would fear future seizures, prompting them to move their funds abroad, further exacerbating the dollar shortage.
• This capital flight would cripple investment, hinder economic growth, and weaken the naira’s value even more.

Black Market Boom:

• Banning or restricting access to forex fuels the black market, leading to unregulated and risky transactions. Criminal activity thrives in such environments, undermining financial stability and security.
• Citizens desperate for forex would turn to the black market, exposing themselves to fraud, money laundering, and extortion.

Erosion of Property Rights and Investor Confidence:

• Seizing private property, even in the form of forex, sets a dangerous precedent, and such a policy could face legal challenges, raising questions about the sanctity of contracts.
• It undermines the fundamental right to ownership and discourages foreign investors, essential for economic development.
• Investors hesitate to enter a market where the government can arbitrarily confiscate assets, creating a vicious cycle of economic stagnation. Confidence is crucial for a stable and thriving foreign exchange market.

Damage to International Reputation:

• Such a policy would attract widespread condemnation, harming Nigeria’s reputation as an investment destination.
• This could isolate the country, impede trade, and make it even harder to access foreign capital.

Economic Impact:

• Forceful conversion may exacerbate the severe dollar shortage rather than solve it. The policy could discourage the inflow of foreign exchange, as individuals and businesses may look for alternative means to protect their assets.
• Investors, both domestic and foreign, may lose trust in the regulatory environment. This could lead to a reduction in foreign direct investment (FDI) and portfolio investment, negatively impacting the overall economy.

Deterioration of Banking Sector Stability:

• The banking sector may face heightened risks as customers withdraw funds due to fear of forced conversion. This could lead to a run on banks and compromise financial stability.

Negative Perception:

• Internationally, such a move could result in a negative perception of Nigeria’s economic policies. It might lead to downgrades by credit rating agencies and affect the country’s standing in the global financial community.
• The implementation of such a policy could raise concerns about the autonomy of the central bank. It might be perceived as an overreach, affecting the institution’s credibility and independence.