Nigeria’s Central Bank Cracks Down on Banks Hoarding Dollars

Abuja, Nigeria: In a bid to curb the volatile exchange rate, Nigeria’s Central Bank of Nigeria (CBN) has ordered commercial banks to sell off their excess dollar holdings by February 1st. This move aims to address concerns about banks speculating on foreign currency fluctuations for profit.

The CBN issued a circular raising alarm over the growing trend of banks accumulating large dollar positions. This practice, known as holding a long Net Open Position (NOP), exposes them to foreign exchange risks and potentially manipulates the market.

The circular, titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” sets new guidelines to limit these risks. Banks must now ensure their NOP, which measures the difference between their foreign currency assets and liabilities, stays within a strict range of 20% short or 0% long of their shareholder funds.

This directive comes amidst recent efforts to unify the official and parallel market exchange rates. In January, the CBN adjusted the methodology for calculating the official rate, causing it to jump from N900/dollar to N1,480/dollar.

Economists have welcomed the move but urged the CBN to address remaining challenges. Clearing the estimated $5 billion backlog in FX requests and consistently funding FX demands at the official window are crucial steps to prevent the parallel market rate from diverging again.

The CBN suspects banks of contributing to this backlog by holding onto excess dollars. The circular gives them until today to sell off these positions, estimated at over $5 billion. Non-compliance will result in sanctions and suspension from the foreign exchange market.

This crackdown follows a similar measure in mid-2023, where the CBN prohibited banks from using their foreign exchange revaluation gains for dividends or operational expenses.

While the naira appreciated slightly at the official window following the new directive, the parallel market saw some volatility. Bureau de Change operators reported selling dollars between N1,511-1,512, with some implementing a temporary “no sales policy” as a strategy to stabilize the naira.

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