The Central Bank of Nigeria (CBN) has directed Deposit Money Banks to reduce their excess dollar reserves by February 1, 2024, aiming to stabilize the fluctuating exchange rate.
This strategy, revealed in a Wednesday circular, is part of the CBN’s broader approach to address volatility in the foreign exchange market.
Expressing concerns about commercial banks maintaining long-term foreign exchange positions for profit, the CBN has issued guidelines titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks” to mitigate associated risks.
This directive follows a recent warning against inaccurate exchange rate reporting and aligns with the FMDQ Exchange’s adjustment in the methodology for calculating the nation’s official exchange rate, leading to a surge in the Nigerian Autonomous Foreign Exchange Market rate.
While economists appreciate the potential for unifying official and parallel market rates, they urge the CBN to address the over $5 billion FX backlog and ensure adequate funding for FX demands to prevent divergence between the two rates.
The latest circular, signed by Dr. Hassan Mahmud and Mrs. Rita Sike of the CBN, accuses banks of holding excess foreign exchange positions. Banks are required to align their Net Open Position (NOP) with new regulations, ensuring it does not exceed 20% short or 0% long of the bank’s shareholders’ funds.
Banks exceeding these limits must adjust their positions by the set deadline. The CBN mandates banks to maintain sufficient high-quality liquid foreign assets and implement robust treasury and risk management systems for overseeing foreign exchange exposures.
Non-compliance may result in sanctions and possible suspension from the foreign exchange market, as warned by the CBN. This initiative aligns with the central bank’s ongoing efforts to ensure stability in the foreign exchange market and promote economic stability.
An anonymous top bank executive revealed that the circular would force banks to sell off excess dollar liquidity exceeding $5 billion. The objective is to prevent banks from holding excess dollar liquidity without commitment to a specific transaction or obligation, contributing to liquidity, stabilizing the exchange rate, and attracting foreign investors.
