CBN Directs Banks to Sell Excess Dollar Stock by February 1 Amid Exchange Rate Concerns

The Central Bank of Nigeria (CBN) has issued a directive ordering Deposit Money Banks (DMBs) to divest their surplus dollar holdings by February 1, 2024.

This move comes amidst growing concerns over the nation’s economic stability and the widening gap between official and parallel market exchange rates.

The directive, outlined in a circular released by the CBN on Wednesday, aims to curb practices where banks retain long-term foreign exchange positions to profit from volatile currency movements.

The central bank believes that such practices exacerbate exchange rate fluctuations and pose risks to the financial system.

The new guidelines introduced in the circular aim to mitigate the risks associated with excessive foreign currency exposure by banks.

One of the key provisions is the imposition of prudential limits on the Net Open Position (NOP) of banks.

The NOP represents the disparity between a bank’s foreign currency assets and liabilities and must not exceed 20% short or 0% long of the bank’s shareholders’ funds.

Banks found to have current NOPs surpassing these limits are mandated to rectify their positions to comply with the new regulations by the stipulated deadline.

Also, the CBN requires banks to maintain sufficient stocks of high-quality liquid foreign assets and adopt robust treasury and risk management systems to oversee foreign exchange exposures effectively.

Failure to comply with the prescribed NOP limit will result in immediate sanctions and suspension from the foreign exchange market, the CBN warned.

The directive reflects the CBN’s commitment to restoring stability in the foreign exchange market and bridging the gap between official and parallel exchange rates.

It underscores the urgency of addressing systemic vulnerabilities and ensuring financial resilience in the face of economic challenges.