In a move to stabilize the nation’s exchange rate, the Central Bank of Nigeria (CBN) has issued a directive compelling Deposit Money Banks to sell their excess dollar stock by February 1, 2024.
The decision, revealed in a circular titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” aims to curb what the CBN perceives as banks exploiting volatile exchange rates for profit.
The circular, released on Wednesday, expressed concerns over the increasing trend of commercial banks holding substantial foreign currency positions, allegedly to capitalize on exchange rate fluctuations.
This follows closely on the heels of another circular from the CBN, warning against false exchange rate reporting by banks and FX dealers.
READ ALSO: CBN Confirms Release Of Naira Note To Commercial Banks.
The adjustment in the methodology for calculating the nation’s official exchange rate by the FMDQ Exchange has raised the official rate from N900/dollar to N1,480/dollar.
While economists and stakeholders applaud the move to unify official and parallel market rates, they challenge the CBN to clear a substantial backlog of over $5 billion in FX and fund FX demands at the official market to prevent a shift in the parallel market rate.
To fund FX requests at the official window, the CBN has accused banks of holding excess foreign exchange positions. The circular, dated January 31, 2024, signed by Dr. Hassan Mahmud and Mrs. Rita Sike, emphasizes the need for banks to sell off excess dollar positions by February 1, 2024.
The directive introduces prudential requirements, focusing on the Net Open Position (NOP), which measures the difference between a bank’s foreign currency assets and liabilities. The NOP must not exceed 20% short or 0% long of the bank’s shareholders’ funds. Banks with current NOPs exceeding these limits must adjust their positions by February 1, 2024.
The CBN also mandates banks to adopt adequate treasury and risk management systems, maintain high-quality liquid foreign assets, and submit daily and monthly NOP and Foreign Currency Trading Position (FCT) calculations using templates provided by the CBN.
Failure to comply with the NOP limit will result in immediate sanctions and suspension from the foreign exchange market, warns the CBN.
A top bank executive, speaking anonymously, predicts that the circular will force banks to sell excess dollar liquidity exceeding $5 billion. The move is expected to inject liquidity, stabilize the exchange rate, and attract foreign investors.
Meanwhile, the naira closed at N1,455.59/$ at the official window, appreciating by 1.82%, while at the parallel market, it lost N61 to trade at N1,511/$. Cryptocurrency trading platforms report a rate of N1,495.1/$ on the peer-to-peer market.
In response to the currency’s recent fluctuations, the Senate’s Committee on Banking, Insurance, and Other Financial Institutions has summoned the CBN governor, Olayemi Cardoso, to appear before them next week to address concerns about the state of the economy and the naira’s fall in the forex market.
The committee expressed particular concern about the inflation index and the economic direction of the country.