As part of efforts to stabilize Nigeria’s volatile exchange rate, the Central Bank of Nigeria (CBN) has taken fresh measures, directing Deposit Money Banks to sell their excess dollar stock by February 1, 2024.
The move aims to curb the practice of hoarding foreign currencies for profit, a practice believed to contribute to the volatility in exchange rates.
The CBN expressed its concern over the growing trend of banks holding substantial foreign currency positions, which it believes exposes them to risks associated with the fluctuating exchange rates. This announcement follows closely on the heels of another circular released by the CBN, warning banks and foreign exchange (FX) dealers against reporting false exchange rates.
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The forex crisis in Nigeria is further exacerbated by the recent adjustment in the methodology used to calculate the nation’s official exchange rate by the FMDQ Exchange. This adjustment has led to a significant shift in the Nigerian Autonomous Foreign Exchange Market rate, moving from approximately N900/dollar to N1,480/dollar. The parallel market also saw the naira closing at 1,450/dollar on Tuesday.
Economists and stakeholders have hailed this move as it is aimed at unifying the official and parallel market exchange rates. However, the adjustment appears to be part of a broader strategy to fund FX requests at the official window.
The CBN, in its latest circular dated January 31, 2024, accused banks of holding excess foreign exchange positions and mandated them to sell off these positions by February 1, 2024. The circular, signed by Dr. Hassan Mahmud, Director, of Trade and Exchange, CBN, and Mrs. Rita Sike, representative of the Director, of Banking Supervision, introduced prudential requirements to manage Net Open Positions (NOP) effectively.
The NOP measures the disparity between a bank’s foreign currency assets and liabilities. The CBN stipulates that the NOP must not exceed 20 percent short or 0 percent long of the bank’s shareholders’ funds. Banks with current NOPs exceeding these limits are required to adjust their positions promptly to comply with the new regulations.
To facilitate compliance, the CBN directed banks to calculate their daily and monthly NOP and Foreign Currency Trading Position (FCT) using specific templates provided by the central bank. Additionally, banks are required to maintain adequate stocks of high-quality liquid foreign assets and adopt treasury and risk management systems to oversee foreign exchange exposures and ensure accurate reporting.
The central bank warned that non-compliance with the NOP limit would result in immediate sanctions and suspension from the foreign exchange market. These stringent measures aim to address the ongoing depreciation of the naira in the FX market. The naira fell to N1,520.123 against the dollar in the parallel market on Wednesday, marking a significant decline within 24 hours.
As a consequence of the escalating FX crisis, the Bureau de Change (BDC) Abuja chapter shut down operations, citing dollar scarcity. The chairman of the association, Abdulahi Dauran, attributed the scarcity to online banking transactions and cryptocurrency. The BDC union announced a ‘no sales policy,’ deciding to close the market temporarily to mitigate the fall of the naira.
“Nobody is coming to market tomorrow. We want to close the market because honestly, the naira is just crashing anyhow. This was caused by some media reports this week that the dollar was now selling for N1,500 even though we were still selling at N1,400. Now everybody is blaming black market operators and that’s why we decided that the market will remain closed tomorrow,” a source familiar with the matter stated.
“We will resume next tomorrow, and the rate should be less than N1,400/$,” the source added.