The Central Bank of Nigeria has ordered deposit money institutions to sell any surplus dollar stock by February 1, 2024, as part of new efforts to fix the country’s erratic currency rate.
The CBN, which made the announcement in a fresh circular issued on Wednesday, also urged lenders not to hold extra foreign currency for profit.
According to officials, the central bank believes that some commercial banks maintain long-term foreign exchange positions in order to profit from exchange rate volatility.
The new circular includes a series of guidelines designed to reduce the hazards associated with these practices.
In the circular headed “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” the CBN expressed worry about the growing tendency of banks to retain substantial foreign currency positions.
The fresh circular comes just 48 hours after the CBN issued a warning to banks and FX traders against reporting fake exchange rates.
The new development happened shortly after the FMDQ Exchange adjusted the technique used to calculate the nation’s official exchange rate.
The review increased the Nigerian autonomous foreign exchange market rate (official exchange rate) from around N900/dollar to N1,480/dollar. The naira closed at 1,450/dollar on the parallel market on Tuesday.
Economists and other stakeholders have welcomed the initiative, which aims to reconcile official and parallel market exchange rates.
They did, however, push the CBN to clear FX backlogs estimated at more than $5 billion while also funding FX needs in the official market. This, they maintained, would prevent the parallel market rate from diverging from the official rate again.
Apparently, as part of its efforts to fund FX requests through the official channel, the CBN accused banks of having excess foreign exchange positions in its most recent circular, which was released Wednesday.
As a result, the central bank gave lenders until February 1, 2024 (today) to sell their excess dollar positions.
The distributed document, dated January 31, 2024, was signed by Dr. Hassan Mahmud, Director of Trade and Exchange, and Mrs. Rita Sike, a representative of the Director of Banking Supervision at the CBN.
The circular stated in part, “The Central Bank of Nigeria has noted with concern the increase in foreign currency exposures of banks through their Net Open Position (NOP).” This has given banks an incentive to retain excessively long foreign currency positions, exposing them to foreign exchange and other risks.”
To address these concerns, the CBN released a circular outlining the prudential rules that banks must follow. These standards place a strong emphasis on managing the Net Open Position (NOP).
The NOP is a measure of a bank’s foreign currency assets (what it holds in foreign currencies) minus its foreign currency liabilities.
The circular states that the NOP cannot exceed 20% short or 0% long of the bank’s shareholders’ funds.
The apex bank stated that this computation must be performed using the Gross Aggregate Method, which provides a full perspective of the bank’s foreign currency exposure.
Furthermore, banks having current NOPs that exceed these restrictions must alter their positions to conform with the new requirements by February 1, 2024.
Additionally, banks must compute their daily and monthly NOP and Foreign Currency Trading Position (FCT) using CBN-provided templates.
The CBN also instructed banks to have sufficient quantities of high-quality liquid foreign assets, such as cash and government securities, in each major currency.
According to the circular, all banks must implement suitable treasury and risk management systems to monitor all foreign exchange exposures and ensure correct reporting on a timely basis.
Banks are obliged to bring all of their exposures within the stipulated limitations promptly and verify that all returns submitted to the CBN accurately reflect their balance sheets.
Finally, the CBN reminded banks that failure to comply with the NOP limit will result in an immediate fine and suspension from the foreign exchange market.
In the first half of 2023, First Bank, UBA, Zenith, Access, and GTB claimed forex revaluation gains totaling N1.38 trillion.
The supreme bank at the time issued a directive urging commercial banks not to use their foreign exchange revaluation profits for dividends or operational expenses. It stated that “banks that exceed the NOP prudential restrictions due to the FX revaluation will be allowed forbearance for the breach upon application.”
According to a prominent bank executive who spoke on the condition of anonymity, the new circular will require institutions to sell excess dollar liquidity surpassing $5 billion.