CBN Directs Banks to Sell Excess Dollars in 24hrs Amidst Naira Fall; Senate Summons Governor for Clarifications

In a bid to stabilize Nigeria’s fluctuating exchange rate, the Central Bank of Nigeria (CBN) has issued a directive compelling Deposit Money Banks to liquidate their excess dollar reserves by February 1, 2024. The move is part of a series of efforts to curb hoarding and speculation in foreign currencies by commercial banks.

A recent circular titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks” expressed concerns about the increasing trend of banks holding substantial foreign currency positions. The CBN aims to mitigate risks associated with such practices by introducing prudential requirements, particularly focusing on managing the Net Open Position (NOP).

The NOP, the difference between a bank’s foreign currency assets and liabilities, must not exceed 20% short or 0% long of the bank’s shareholders’ funds. Banks exceeding these limits are required to adjust their positions by February 1, 2024.

To ensure compliance, the CBN directed banks to adopt specific templates for calculating daily and monthly NOP and Foreign Currency Trading Position (FCT). Additionally, banks are mandated to maintain sufficient high-quality liquid foreign assets and implement robust treasury and risk management systems.

Non-compliance with the NOP limit is met with immediate sanctions and suspension from the foreign exchange market, warns the CBN.

The directive comes on the heels of adjustments to the nation’s official exchange rate methodology by the FMDQ Exchange, pushing the official exchange rate from N900/dollar to N1,480/dollar. While economists and stakeholders applaud the move to unify official and parallel market rates, challenges persist, with calls for the CBN to address a backlog of over $5 billion in foreign exchange.

In response to the directive, a top banking executive revealed that the circular would force banks to sell excess dollar liquidity exceeding $5 billion. The move aims to inject liquidity into the market, stabilize the exchange rate, and attract foreign investors.

Meanwhile, the naira closed at N1,455.59/$ at the official window on Wednesday, showing a 1.82% appreciation from the previous day. In the parallel market, it lost N61 to trade at N1,511/$. The cryptocurrency peer-to-peer market recorded the naira trading at N1,495.1/$ on Binance’s platform.

The Senate, concerned about the state of the economy and the naira’s fall, has summoned CBN Governor Olayemi Cardoso to appear before the Committee on Banking, Insurance, and Other Financial Institutions on Tuesday next week for clarification.

As the CBN takes decisive measures to address foreign exchange challenges, all eyes are on the outcomes of these actions in stabilizing Nigeria’s economic landscape.