The Central Bank of Nigeria has taken new steps to stabilize the country’s exchange rate. It directed banks to sell their excess dollar reserves by February 1, 2024.
The central bank is concerned that some banks are holding onto large foreign exchange positions for long-term gains, taking advantage of volatile exchange rates.
In a circular titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” the CBN expressed worries about the increasing trend of banks holding substantial foreign currency positions.
This move follows another circular released just 48 hours earlier, cautioning banks and FX dealers against reporting false exchange rates.
The adjustment in the methodology for calculating the official exchange rate by the FMDQ Exchange has led to a change in the Nigerian Autonomous Foreign Exchange Market rate, moving from approximately N900/dollar to N1,480/dollar.
The goal is to unify the official and parallel market exchange rates, a move supported by economists and stakeholders.
However, concerns have been raised, urging the CBN to clear the backlog of foreign exchange estimated at over $5 billion and fund FX demands at the official market. This is seen as a preventive measure to avoid the parallel market rate deviating from the official rate again.
As part of efforts to fund FX requests at the official window, the CBN, in its latest circular, accused banks of holding excessive foreign exchange positions. Banks have been given until February 1, 2024, to sell off these excess dollar positions.
The circular, dated January 31, 2024, and signed by the Director, Trade and Exchange, CBN, Dr. Hassan Mahmud, outlines prudential requirements for banks.
One significant focus is on managing 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 are mandated to adjust their positions by February 1, 2024.
They are also required to calculate their daily and monthly NOP and Foreign Currency Trading Position (FCT) using templates provided by the CBN.
The CBN emphasizes the need for banks to maintain sufficient high-quality liquid foreign assets, adopt treasury and risk management systems, and ensure compliance with set limits.
Non-compliance with the NOP limit will result in immediate sanctions and suspension from the foreign exchange market.
