CBN directs banks to sell excess dollar reserves within 24 hours for exchange rate stability

In its latest efforts to stabilize the nation’s volatile exchange rate, the Central Bank of Nigeria (CBN) has directed Deposit Money Banks to divest their surplus dollar stocks by February 1, 2024.

The CBN, as revealed in a circular released on Wednesday, cautioned banks against hoarding excess foreign currencies for speculative gains. The central bank suspects that certain commercial banks maintain extended foreign exchange positions to capitalize on the fluctuating exchange rates.

The new circular, titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” introduces guidelines aimed at mitigating the associated risks of such practices. This follows a warning issued by the CBN just 48 hours prior, advising banks and FX dealers against reporting false exchange rates.

The development coincides with the adjustment of the methodology for calculating the nation’s official exchange rate by the FMDQ Exchange. This adjustment has resulted in the Nigerian Autonomous Foreign Exchange Market rate rising from approximately N900/dollar to N1,480/dollar, with the parallel market closing at 1,450/dollar on Tuesday.

Economists and stakeholders have praised the move, aimed at unifying the official and parallel market exchange rates. However, they challenge the CBN to address the FX backlogs exceeding $5 billion and fund FX demands in the official market to prevent a divergence between the parallel and official rates.

As part of the efforts to fund FX requests in the official window, the CBN, in its recent circular, accused banks of maintaining excessive foreign exchange positions. Consequently, the central bank has mandated lenders to sell off surplus dollar positions by February 1, 2024.

The circular, dated January 31, 2024, and signed by the Director, Trade and Exchange, CBN, Dr. Hassan Mahmud, along with the representative of the Director, Banking Supervision, CBN, Mrs. Rita Sike, expresses concern over the growing foreign currency exposures of banks, particularly through their Net Open Position (NOP). The NOP, measuring the disparity between a bank’s foreign currency assets and liabilities, must not exceed 20 per cent short or 0 per cent long of the bank’s shareholders’ funds.

Banks with NOPs exceeding these limits are required to adjust their positions to comply with the new regulations by February 1, 2024. Additionally, banks must use specific templates provided by the CBN to calculate their daily and monthly NOP and Foreign Currency Trading Position (FCT).

The CBN emphasizes the need for banks to maintain sufficient high-quality liquid foreign assets and adopt robust treasury and risk management systems. Non-compliance with the NOP limit will result in immediate sanctions and suspension from the foreign exchange market.

In the first half of 2023, major banks reported substantial forex revaluation gains, prompting the CBN to caution against using these gains for dividends and operational expenditures. The new circular is expected to compel banks to divest excess dollar liquidity, aiming to enhance liquidity and stabilize the exchange rate, attracting foreign investors.