CBN’s Bold Move: Overhauling Forex Practices for a Stable Exchange Rate

In a significant bid to tame the seesawing exchange rates, the Central Bank of Nigeria (CBN) has rolled out a game-changing directive, compelling Deposit Money Banks to shed their surplus dollar reserves by February 1, 2024.

Unveiled in a circular on Wednesday, this strategic move is part of the CBN’s comprehensive plan to tackle the inherent volatility in the foreign exchange market. Expressing concern over certain banks maintaining prolonged foreign exchange positions for speculative gains, the CBN aims to curb these practices through the newly issued guidelines titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks.”

This directive closely follows a prior circular cautioning banks and FX dealers against inaccurate reporting of exchange rates. Additionally, the recent adjustment in the FMDQ Exchange’s methodology for calculating the official exchange rate has been praised for potentially aligning the official and parallel market rates.

However, economists stress the urgency for the CBN to address the over $5 billion FX backlog and ensure ample funding for FX demands at the official market to prevent a widening gap between the official and parallel market rates.

The latest circular, signed by Dr. Hassan Mahmud and Mrs. Rita Sike of the CBN, accuses banks of holding excess foreign exchange positions. It mandates banks to align their Net Open Position (NOP) with the new regulations, restricting the NOP to a maximum of 20 per cent short or 0 per cent long of the bank’s shareholders’ funds, calculated via the Gross Aggregate Method. Banks exceeding these limits must adjust their positions by the stipulated deadline.

Furthermore, banks are now compelled to maintain substantial stocks of high-quality liquid foreign assets and implement robust treasury and risk management systems to monitor all foreign exchange exposures. Non-compliance with these directives carries the risk of sanctions and potential suspension from the foreign exchange market, as warned by the CBN.

A senior banking executive, speaking anonymously, revealed that this directive would compel banks to liquidate excess dollar holdings, surpassing the $5 billion mark. The move aims to inject liquidity, stabilize the exchange rate, and potentially attract foreign investors, as Nigeria endeavors to achieve economic stability.

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