CBN Orders Banks to Dump Excess Dollars by February 1

The Central Bank of Nigeria (CBN) has given Deposit Money Banks a deadline of February 1, 2024, to offload their excess dollar reserves as part of its measures to stabilize the exchange rate. The CBN announced this in a circular on Wednesday, expressing its concern over the long-term foreign exchange positions held by some banks to benefit from the exchange rate fluctuations.

The circular, titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” outlined the new guidelines for banks to reduce the risks associated with these practices. The CBN also warned banks and FX dealers against reporting inaccurate exchange rates in another circular.

The CBN’s move comes after the FMDQ Exchange adjusted the methodology for calculating the nation’s official exchange rate, resulting in a surge of the Nigerian Autonomous Foreign Exchange Market rate from about N900/dollar to N1,480/dollar. This was seen as a positive step by economists to harmonize the official and parallel market rates.

However, economists also advised the CBN to clear the over $5bn FX backlog and ensure adequate funding for FX demands at the official market to avoid divergence between the official and parallel market rates.

The latest circular, signed by Dr. Hassan Mahmud, Director of Trade and Exchange, CBN, and Mrs. Rita Sike, representative of the Director of Banking Supervision, CBN, accused banks of holding excess foreign exchange positions. It instructed banks to align their Net Open Position (NOP) with the new regulations, which limit the NOP to 20 per cent short or 0 per cent long of the bank’s shareholders’ funds, calculated using the Gross Aggregate Method. Banks exceeding these limits must adjust their positions by the deadline.

The CBN also mandated banks to maintain sufficient stocks of high-quality liquid foreign assets and adopt robust treasury and risk management systems to oversee all foreign exchange exposures. The CBN threatened to sanction and possibly suspend non-compliant banks from the foreign exchange market.

This initiative is part of the CBN’s efforts to ensure stability in the foreign exchange market and promote economic stability.

A top bank executive, who spoke anonymously with Punch, said the new circular would compel banks to sell off excess dollar liquidity exceeding $5bn. He 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 be liquidity and the exchange rate will stabilise. Foreign investors will come in.”