CBN Initiates Measures to Stabilise Exchange Rate

Amid efforts to stabilise the nation’s volatile exchange rate, the Central Bank of Nigeria (CBN) has issued directives requiring Deposit Money Banks (DMBs) to sell their excess dollar stock by February 1, 2024. The CBN expressed concerns about commercial banks holding long-term foreign exchange positions to profit from exchange rate volatility, leading to the release of a circular introducing guidelines aimed at mitigating associated risks.

The circular, titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” underscores the CBN’s worries over the growing trend of banks holding substantial foreign currency positions. The regulatory measures set out in the circular focus on managing Net Open Position (NOP), the difference between a bank’s foreign currency assets and liabilities.

Key points from the circular include a mandate that NOP must not exceed 20% short or 0% long of the bank’s shareholders’ funds, calculated using the Gross Aggregate Method. Banks exceeding these limits are required to adjust their positions to comply with the new regulations by February 1, 2024. The CBN also directed banks to calculate daily and monthly NOP and Foreign Currency Trading Position (FCT) using specific templates provided.

Furthermore, banks are instructed to maintain adequate stocks of high-quality liquid foreign assets and adopt treasury and risk management systems to oversee foreign exchange exposures accurately. Non-compliance with the NOP limit may result in immediate sanctions and suspension from the foreign exchange market, as warned by the CBN.

The move comes shortly after the CBN’s adjustment of the methodology for calculating the nation’s official exchange rate, contributing to a shift in the Nigerian Autonomous Foreign Exchange Market rate. Economists and stakeholders have welcomed the move to unify official and parallel market exchange rates but challenge the CBN to address FX backlogs estimated at over $5 billion.

In response to these developments, the Naira experienced fluctuations, closing at N1,455.59/$ at the official window, a 1.82% appreciation. However, at the parallel market, it lost N61, trading at N1,511/$. The cryptocurrency peer-to-peer market showed the Naira trading at N1,495.1/$ on Binance’s P2P platform.

Additionally, the Senate, through its Committee on Banking, Insurance, and Other Financial Institutions, has summoned the Governor of the CBN, Olayemi Cardoso, to appear before it on Tuesday next week to address concerns about the state of the economy and the Naira’s fall in the forex market.