In an effort to stabilize the nation’s volatile exchange rate, the Central Bank of Nigeria (CBN) has directed Deposit Money Banks to sell their excess dollar stock by the latest date of February 1, 2024, as revealed by a new circular. The directive specifically targets excess dollar liquidity exceeding $5 billion held by these banks.
The CBN, through the circular released on Wednesday, issued a warning to lenders against hoarding excess foreign currencies for profit. The central bank believes that some commercial banks hold long-term foreign exchange positions with the intention of profiting from the volatile movements in exchange rates. The new circular introduces guidelines to mitigate the risks associated with such practices.
Titled “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks,” the circular expresses concern about the increasing trend of banks holding substantial foreign currency positions. This development follows a previous circular released by the CBN just 48 hours earlier, cautioning banks and foreign exchange dealers against reporting false exchange rates, among other issues.
The CBN’s directive also aligns with recent adjustments in the methodology used to calculate the nation’s official exchange rate by the FMDQ Exchange.
The underlying message in this new circular is that banks must not hold excess dollar liquidity without a clear purpose. The CBN aims to ensure that any foreign exchange held by banks is committed to a specific transaction or obligation that can be verified. This move is seen as a response to the practice of banks making gains by holding excess dollar liquidity without a designated purpose. By enforcing the sale of these excess dollars, the CBN hopes to increase liquidity, stabilize the exchange rate, and attract foreign investors to the market.