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CBN DIRECTS BANKS TO LIQUIDATE DOLLAR RESERVES

The Central Bank of Nigeria (CBN) has issued a directive instructing Deposit Money Banks to divest their excess dollar

CBN DIRECTS BANKS TO LIQUIDATE DOLLAR RESERVES

The Central Bank of Nigeria (CBN) has issued a directive instructing Deposit Money Banks to divest their excess dollar reserves by February 1, 2024. This announcement, outlined in a circular released on Wednesday, warns banks against hoarding foreign currencies solely for profit, a practice the CBN believes contributes to exchange rate fluctuations.

The circular, titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” introduces guidelines to address the risks associated with prolonged accumulation of significant foreign currency reserves by banks. This directive follows closely on the heels of another circular issued just 48 hours prior, cautioning banks and FX dealers against reporting inaccurate exchange rates and other infractions.

These developments coincide with a recent adjustment in the methodology used to calculate Nigeria’s official exchange rate by the FMDQ Exchange, resulting in a notable shift from approximately N900/dollar to N1,480/dollar. While the parallel market saw the naira closing at 1,450/dollar on Tuesday, stakeholders have commended the move to align official and parallel market rates.

However, concerns linger about FX backlogs exceeding $5 billion, prompting calls for the CBN to address these backlogs and ensure sufficient funding of FX demands at the official market to prevent disparities between official and parallel rates.

In its latest circular, dated January 31, 2024, the CBN accused banks of holding surplus foreign exchange positions and directed them to divest these positions by February 1, 2024 (today). The circular, signed by Hassan Mahmud, Director of Trade and Exchange at the CBN, and Rita Sike, representative of the Director of Banking Supervision, outlines prudential requirements for banks, particularly focusing on managing the Net Open Position (NOP).

The NOP assesses the gap between a bank’s foreign currency assets and liabilities, with the circular specifying that the NOP should not exceed 20 percent short or 0 percent long of the bank’s shareholders’ funds. Banks exceeding these limits are mandated to realign their positions by February 1, 2024.

The circular further instructs banks to compute their daily and monthly NOP and Foreign Currency Trading Position (FCT) using templates provided by the CBN. Banks are also urged to maintain adequate reserves 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 the NOP limit is warned to result in immediate sanctions and suspension from the foreign exchange market.

Quest: Emmanuel kelvin

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