CBN Orders Banks to Sell Excess Dollar Stock by Feb 1

In a bid to stabilize the nation’s volatile exchange rate, the Central Bank of Nigeria (CBN) has directed Deposit Money Banks to divest their surplus dollar reserves by February 1, 2024.

This directive was disclosed in a recent circular released by the CBN, which also cautioned banks against hoarding excess foreign currencies for profit-making purposes. The central bank expressed concerns that some commercial banks maintain long-term foreign exchange positions to exploit fluctuations in exchange rates.

The new circular introduces a set of guidelines aimed at mitigating the risks associated with such practices. Titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” it raises alarms over the increasing trend of banks holding substantial foreign currency positions.

This development follows closely on the heels of another circular issued by the CBN, which warned banks and FX dealers against reporting false exchange rates. Additionally, it coincides with adjustments in the methodology for calculating the nation’s official exchange rate by the FMDQ Exchange. This review has resulted in a shift in the Nigerian Autonomous Foreign Exchange Market rate (official exchange rate) from approximately N900/dollar to N1,480/dollar, with the parallel market rate closing at 1,450/dollar on Tuesday.

While economists and stakeholders have welcomed this move towards unifying official and parallel market exchange rates, they urge the CBN to address FX backlogs estimated at over $5bn and provide adequate funding for FX demands at the official market to prevent a recurrence of disparities between the two rates.

As part of efforts to meet FX demands at the official window, the CBN’s latest circular accuses banks of maintaining excess foreign exchange positions. Consequently, banks are required to liquidate these excess dollar positions by February 1, 2024.

Signed by Dr. Hassan Mahmud, Director of Trade and Exchange at the CBN, and Mrs. Rita Sike, a representative of the Director of Banking Supervision, the circular emphasizes the need for banks to adhere to prudential requirements outlined to manage their Net Open Position (NOP). The NOP measures the disparity between a bank’s foreign currency assets and liabilities and must not exceed certain thresholds stipulated by the CBN.

Banks with current NOPs exceeding these limits are instructed to adjust their positions accordingly by the specified deadline. Additionally, banks must utilize specific templates provided by the CBN to calculate their daily and monthly NOP and Foreign Currency Trading Position (FCT).

Furthermore, the CBN mandates banks to maintain adequate stocks of high-quality liquid foreign assets and implement robust treasury and risk management systems to oversee foreign exchange exposures and ensure accurate reporting.

Failure to comply with these regulations will result in immediate sanctions and suspension from the foreign exchange market, as warned by the CBN.

In a related development, several banks including First Bank, UBA, Zenith, Access, and GTB reported a combined N1.38tn in forex revaluation gains in the first half of 2023. The CBN, however, directed these banks to refrain from utilizing these gains for dividends and operational expenses.

According to a top bank executive, the new circular will compel banks to divest excess dollar liquidity, thereby enhancing liquidity in the market and stabilizing the exchange rate.