In a bid to address the volatility in Nigeria’s exchange rate, the Central Bank of Nigeria (CBN) has issued a directive instructing Deposit Money Banks (DMBs) to sell their excess dollar stocks by February 1, 2024. The move is part of the CBN’s strategy to stabilize the nation’s exchange rate and prevent hoarding of foreign currencies for profit.
The new circular, titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” raises concerns about the growing trend of banks holding substantial foreign currency positions. This follows a previous warning issued by the CBN to banks and foreign exchange dealers against reporting false exchange rates.
The CBN’s latest move coincides with adjustments made by the FMDQ Exchange in the calculation methodology of the nation’s official exchange rate. This modification has led to the Nigerian Autonomous Foreign Exchange Market rate increasing from approximately N900/dollar to N1,480/dollar, with the naira closing at 1,450/dollar in the parallel market on Tuesday.
Economists and stakeholders commend the effort to unify the official and parallel market exchange rates but challenge the CBN to clear a backlog of foreign exchange transactions estimated at over $5 billion. They emphasize the importance of funding FX demands in the official market to prevent a divergence between the parallel and official rates.
The CBN’s new circular introduces prudential requirements aimed at mitigating the risks associated with banks holding large foreign currency positions. One key focus is on the Net Open Position (NOP), measuring the difference between a bank’s foreign currency assets and liabilities. The circular mandates that NOP must not exceed 20 percent short or 0 percent long of the bank’s shareholders’ funds.
Banks with current NOPs exceeding these limits are required to adjust their positions to comply with the new regulations by February 1, 2024. Additionally, banks must adopt treasury and risk management systems, calculate daily and monthly NOP and Foreign Currency Trading Position (FCT), and maintain adequate stocks of high-quality liquid foreign assets.
The CBN warns that non-compliance with the NOP limit will result in immediate sanctions and suspension from the foreign exchange market. Analysts anticipate that this move will prompt banks to sell off excess dollar liquidity exceeding $5 billion.
Meanwhile, the naira closed at N1,455.59/$ at the official window, showing appreciation, while the parallel market experienced fluctuations, with some Bureau De Change operators temporarily closing operations to address concerns about the naira’s depreciation.
In response to the economic challenges, the Senate’s Committee on Banking, Insurance, and Other Financial Institutions has summoned the CBN Governor, Olayemi Cardoso, to appear before it on Tuesday to provide insights into the state of the economy and the recent fall of the naira in the forex market. The committee expresses concern about the inflation index and aims to seek clarification on the government’s economic strategy.