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The Central Bank of Nigeria (CBN) has issued a circular instructing Deposit Money Banks to divest their surplus dollar holdings by February 1, 2024, in a bid to stabilize the country’s fluctuating exchange rate. The circular, titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” introduces guidelines to mitigate risks associated with banks holding extensive foreign currency positions.
Concerned about the increasing trend of banks maintaining substantial foreign currency positions, the CBN aims to reduce the potential for profit-seeking through long-term foreign exchange positions. The directive comes shortly after a prior circular warning against false exchange rate reporting.
The move aligns with the recent adjustment in the official exchange rate methodology by the FMDQ Exchange, resulting in a shift from approximately N900/dollar to N1,480/dollar. Economists and stakeholders applauded this step towards unifying official and parallel market exchange rates.
To address concerns about banks holding excess long foreign currency positions, the CBN’s circular introduces prudential requirements, notably focusing on the Net Open Position (NOP). The NOP measures the disparity between a bank’s foreign currency assets and liabilities. Banks must ensure that their NOP does not exceed 20% short or 0% long of their shareholders’ funds. Those exceeding these limits must adjust their positions to comply with the new regulations by February 1, 2024.
Additionally, the CBN mandates banks to calculate daily and monthly NOP and Foreign Currency Trading Position (FCT) using templates provided by the CBN. Adequate treasury and risk management systems are also required to oversee foreign exchange exposures and ensure accurate reporting.
Banks failing to comply with the NOP limit face immediate sanctions and suspension from the foreign exchange market. This move is anticipated to encourage banks to sell excess dollars, infusing liquidity into the market and stabilizing the exchange rate. Analysts suggest that selling surplus dollars could exceed $5 billion.
While the official window saw a 1.82% appreciation of the naira to N1,455.59/$, the parallel market experienced a loss to N1,511/$. The cryptocurrency peer-to-peer market recorded the naira trading at N1,495.1/$ on Binance’s P2P platform. In response to market volatility, some Bureau De Change operators have reportedly decided to close the market temporarily.
Amid these developments, the Senate’s Committee on Banking, Insurance, and Other Financial Institutions summoned CBN Governor Olayemi Cardoso to appear on Tuesday to address concerns about the economy and the naira’s fall in the forex market.
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