Central Bank of Nigeria orders banks to sell excess dollars in 24 hours
The CBN mandates banks to liquidate extra dollars within a day.
•Banks may sell over $5bn, says official, Cardoso faces Senate Tuesday over naira fall
Deposit Money Banks are required to sell their excess dollar stock by February 1, 2024, at the latest, by the Central Bank of Nigeria, which is taking further steps to stabilize the country’s unstable exchange rate.
In addition to disclosing the information in a fresh circular that was made public on Wednesday, the CBN cautioned lenders against accumulating surplus foreign exchange for financial advantage.
Officials said the central bank thinks some commercial banks maintain long-term foreign exchange positions in order to take advantage of the unpredictable fluctuations in exchange prices.
In an effort to lower the dangers connected to these behaviors, a new circular presents a series of rules.
The CBN expressed worries about the growing tendency of banks having significant foreign currency assets in a circular titled “Harmonization of Reporting Requirements on Foreign Currency Exposures of Banks.”
Less than 48 hours had passed since the CBN issued a circular cautioning banks and foreign exchange dealers not to report fictitious exchange rates, among other things.
The latest development also coincided with the FMDQ Exchange’s modification of the process for determining the country’s official exchange rate.
The official exchange rate of the Nigerian Autonomous Foreign Exchange Market was around N900/dollar before the review, but it is now N1,480/dollar. In the parallel market on Tuesday, the naira finished at 1,450 per dollar.
Economists and other interested parties have applauded the action, which aims to harmonize the exchange values on the official and black markets.
On the other hand, they put the CBN under pressure to pay off foreign exchange requests at the official market and to clear backlogs estimated to be worth over $5 billion. They said that doing this would prevent the parallel market rate from deviating from the official rate once more.
The CBN accused banks of maintaining excess foreign currency positions in its most recent circular, which was published on Wednesday. This accusation appears to be related to efforts to fund FX requests at the official window.
Consequently, the central bank granted lenders until today, February 1, 2024, to liquidate their surplus dollar holdings.
The distributed document, dated January 31, 2024, was signed by Mrs. Rita Sike, a representative of the CBN’s Director of Banking Supervision, and Dr. Hassan Mahmud, the director of trade and exchange.
The circular read in part, “The Central Bank of Nigeria has noted with concern the growth in foreign currency exposures of banks through their Net Open Position (NOP). This has created an incentive for banks to hold excess long foreign currency positions, which exposes banks to foreign exchange and other risks.”
The CBN published prudential guidelines in the circular that banks must abide by in order to remedy these problems. The management of the Net Open Position (NOP) is a primary emphasis of these standards.
The NOP calculates the difference between a bank’s foreign currency liabilities—that is, the money it owes in foreign currencies—and its foreign currency assets, or what it owns.
The circular stipulates that the net operating profit (NOP) cannot surpass twenty percent short or zero percent long of the bank’s shareholders’ funds.
The highest bank stated that the Gross Aggregate Method, which offers a thorough understanding of the bank’s foreign exchange exposure, must be used for this computation.
Additionally, by February 1, 2024, at the latest, banks whose present NOPs exceed these restrictions must modify their positions to conform to the new rules.
Also, banks must use particular templates supplied by the CBN to compute their Foreign Currency Trading Position (FCT) and Daily and Monthly Net Operating Profit (NOP).
Additionally, the Central Bank of Nigeria instructed banks to keep sufficient amounts of liquid, high-quality foreign assets in each major currency, such as cash and government securities.
The circular states that all banks must implement sufficient risk and treasury management systems in order to oversee all foreign exchange exposures and guarantee prompt, accurate reporting.
Banks must promptly bring all of their exposures under the established limitations and make sure that the Central Bank of Nigeria receives returns that accurately represent their balance sheets.
Lastly, the Central Bank of Nigeria issued a warning to banks, stating that they would face immediate sanctions and removal from the foreign currency market if they did not comply with the NOP limit.
First Bank, UBA, Zenith, Access, and GTB reported a total N1.38tn in FX revaluation gains in the first half of 2023.
At the time, the top bank issued an order telling commercial banks not to use the gains from their foreign exchange revaluation for dividend payments or operating expenses. Banks that exceed the NOP prudential limitations as a result of the FX revaluation will be eligible for forbearance for the breach upon application, according to the statement.
A top bank executive, who spoke on condition of anonymity, said the new circular would force banks to sell off excess dollar liquidity exceeding $5bn.
The top banker said, “Just as some Nigerians prefer to keep their money in dollars because naira is not a good store of value, banks also hold excess dollar liquidity to make gains. They do their own at institutional level. What the CBN is saying with this new circular is that, you cannot hold excess dollar liquidity again. Any foreign exchange you are holding must be committed to something, a transaction or obligation you can proof. Banks have made a lot of revaluation gains. Some banks, I believe, got approval under the last administration to hold more dollar than the requirement. The idea is that if banks sell all these excess dollars, there will liquidity and the exchange rate will stabilise. Foreign investors will come in.”
Naira trades
Meanwhile, the naira closed at N1,455.59/$ at the official window on Wednesday, according to the FMDQ Securities Exchange. This is a 1.82 per cent appreciation from the N1482.57/$ it closed trading on Tuesday.
At the parallel market, it lost N61 to trade at N1,511/$. A Bureau De Change operator, Malam Ibrahim, told The PUNCH, “For now, we are selling between N1,511/$ and N1,512/$. Earlier today, the dollar was sold between N1,535/$ and N1,540/$.”
Another vendor claimed he could only make a profit of N1,510 per dollar. But tomorrow, the BDC union will enforce a “no sales policy,” according to a source who told our correspondent at the market.
According to the source, the decision was made today following careful consideration of several options for slowing the naira’s decline.
“Nobody is coming to market tomorrow. We want to close the market because honestly, the naira is just crashing anyhow. This was caused by some media reports this week that the dollar was now selling for N1,500 even though we were still selling at N1,400. Now everybody is blaming black market operators and that’s why we decided that the market will remain closed tomorrow,” the source said.
“We will resume next tomorrow, and the rate should be less than N1,400/$,” the source added.
At the time of reporting this story, the naira was trading at N1,495.1/$ on Binance’s P2P platform, a peer-to-peer cryptocurrency market.
With FMDQ Securities Exchange’s decision to alter the exchange rate-setting process, the naira is having its worst week on the official market. A market notification states that the goal of this new computation is to try and close the difference between the official and parallel rates of the naira.
It said, “This revision aims to address recent fluctuations and challenges encountered in the Nigerian Foreign Exchange (‘FX’) Market.”
It added, “These revisions are focused on enhancing the accuracy and reliability of the NAFEX and NAFEM rates determination process, with a focus on data availability and integrity involving a rigorous data validation process, including tolerance checks which shall be applied by FMDQ Exchange, subject to internal policies and procedures.”
Senate summons Cardoso
On Wednesday, the Senate, acting through its Committee on Banking, Insurance, and Other Financial Institutions, called Olayemi Cardoso, the Governor of the Central Bank of Nigeria, to appear before it on Tuesday of the following week to respond to inquiries regarding the current status of the economy and the depreciation of the naira in the foreign exchange market.
It was recorded that on Wednesday, when the value of the naira fell to more than N1,500 per dollar, the Committee convened under the chairmanship of Senator Adetokunbo Abiru (APC Lagos East) and decided to call a meeting of the Central Bank of Nigeria governor en route.
On Tuesday, the naira reached an all-time low of N1,482 to $1 at the official window.
On Monday, the local unit closed at 1,348 versus the US dollar following an examination of the process of the FMDQ Security Exchange to determine its rates.
After the closed-door discussion at the National Assembly, Abiru talked with reporters and stated that the parliamentarians were very concerned about the situation of the economy, particularly the inflation index.
He said, “We have held a meeting this afternoon essentially to focus on the direction of the Nigerian economy.
“We are all living witnesses of what is going on. Underlining the major issue of the economy is the way the inflation index has been and of course, it is a major concern to us.
“We have deliberated among ourselves. Critical issues were addressed and we believe that the next line of action is to summon the CBN governor on Tuesday at 3 O’clock to brief us properly on the state of the economy.
“That we have resolved and will communicate to the governor of the CBN after which we will have further communication with members of the press.”
A part of this report was taken from Punch
Whitney Spencer
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