In an effort to stabilise the country’s fluctuating exchange rate, the Central Bank of Nigeria (CBN) has mandated Deposit Money Banks to divest their surplus dollar reserves by February 1, 2024.
The CBN, in a recent circular issued on Wednesday, cautioned against banks hoarding excess foreign currencies for profit, citing concerns about long-term foreign exchange positions.
The circular titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks” addresses the increasing trend of banks holding substantial foreign currency positions.
This move comes shortly after another circular warning against false reporting of exchange rates and amid adjustments to the methodology determining the official exchange rate by the FMDQ Exchange.
The new circular introduces guidelines to mitigate the risks associated with these practices. Key among these requirements is the management of 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 beyond these limits are directed to adjust their positions by February 1, 2024.
Additionally, banks must use specific templates provided by the CBN to calculate the daily and monthly NOP and Foreign Currency Trading Position (FCT). The CBN emphasised the need for banks to maintain sufficient high-quality liquid foreign assets and implement adequate treasury and risk management systems.
The central bank warned of immediate sanctions and suspension from the foreign exchange market for non-compliance with the NOP limit. Economists and stakeholders have praised recent measures to unify official and parallel market exchange rates but called for the resolution of FX backlogs, estimated at over $5 billion.
As the naira experiences challenges in the official market, the CBN’s latest directive aims to ensure transparency and stability in the foreign exchange market. The naira closed at N1,455.59/$ at the official window on Wednesday, appreciating by 1.82% from the previous day. However, the parallel market saw a decline, with some operators implementing a ‘no sales policy’ to address the depreciation of the naira.
The CBN’s Governor, Olayemi Cardoso, has been summoned by the Senate Committee on Banking, Insurance, and Other Financial Institutions to address concerns about the economy and the fall of the naira in the forex market.
