Nigeria: CBN Unfolds Measures to Boost Fx Supply, Mitigate Foreign Currency Speculation

In a major policy initiative aimed at market correction and to boost FX supply, the Central Bank of Nigeria (CBN), yesterday, mandated deposit money banks (DMBs) to ensure that the Net Open Position (NOP) limit of their overall foreign currency assets and liabilities on-and-off-balance sheet did not exceed 20 per cent short or zero per cent long of shareholders’ funds unimpaired by losses using the gross aggregate method.

Also, in a separate circular dated January 31, 2024, that was signed by the Director, Trade and Exchange Department, Dr. Hassan Mahmud, the CBN announced the removal of allowable limit of exchange rate quoted by the International Money Transfer Operators (IMTOs).

The move by the apex bank is also aimed to curtailing foreign currency speculation in the FX market.

But the naira yesterday reached an all-time low on the parallel market, where it traded for N1, 530/$1. On the I&E Window, however, it closed at N1, 455.59/$1 yesterday, gaining N26.98, compared to the N1, 482.57/$ recorded on Tuesday. The naira depreciated by N70 in one day on the parallel market, compared with the N1, 460/$1 it recorded the previous day.

Notably, the official window recorded an increase in daily turnover from $72.33 million on Tuesday to $134.07 million yesterday, indicating an 85.27 per cent increase.

The highest spot rate recorded yesterday was N1, 509/$1, while the lowest spot rate recorded was N789/$1.

Meanwhile, Senate Committee on Banking, Insurance and other Financial Institutions, yesterday, summoned the CBN governor Mr. Olayemi Cardoso, to appear before it next Tuesday to address the state of the economy and the free fall of the naira in the past few days.

The latest directive by the central bank came amid concerns over the growth in foreign currency exposures of banks through their NOP. The central bank disclosed this in new prudential requirements it issued to all banks via a circular dated January 31, 2024 and signed jointly by CBN Director, Trade and Exchange, Dr. Hassan Mahmud, and Mrs. Rita Ijeoma Sike, for CBN Director, Banking Supervision.

CBN stated that the development had created an incentive for banks to hold excess long foreign currency positions, which exposed them to foreign exchange and other risks.

Analysts expressed optimism that the new policy regime would have salutary impact on the FX market, in particular, and the economy, in general. They estimated that the reform could cause between $4 billion and $6 billion inflows to the market amid the current liquidity challenges.

NOP in one foreign currency is the net outstanding balance of all assets, liabilities, and off-balance sheet items in that currency.

The net open position in debit is often referred to as “long” while the position in credit is defined as “short”.

According to the apex bank, the updated regulation seeks to ensure that the risks are well managed. It also seeks to avoid losses that can pose material systemic challenges to the financial industry.

The CBN circular titled, “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Bank,” further directed that banks whose current NOP exceeded the approved limits of their shareholders’ funds unimpaired by losses were required to bring them to prudential limit by February 1, 2024.

Under the new regulatory regime, banks are further required to compute their daily and monthly NOP and Foreign Currency Trading Position (FCTP) using approved templates.

The central bank stated that banks would also be required to have adequate stock of high-quality liquid foreign assets, including cash and government securities in each significant currency to cover their maturing foreign currency obligations.

Additionally, banks were required to borrow and lend in the same currency (natural hedging) to avoid currency mismatch associated with foreign currency risk.

CBN further directed that the basis of the interest rate for borrowing should be the same as that of lending, pointing out that there should be, “No mismatch in floating and fixed interest rates, to mitigate basis risk associated with foreign borrowing interest rate risk.”

With respect to Eurobonds, the central bank advised that any clause of early redemption should be at the instance of the issuer and approval obtained from the CBN in this regard, even if the bond did not qualify as tier 2 capital.

Moreover, all banks were required to adopt adequate treasury and risk management systems to provide oversight of all foreign exchange exposures and ensure accurate reporting on a timely basis.

Banks were expected to bring all their exposures within the set limits immediately and ensure that all returns submitted to the CBN provide an accurate reflection of their balance sheets.

The central bank warned that non-compliance with the NOP limit would result in immediate sanction and/or suspension from participation in the foreign exchange market.

In the circular on IMTOs’ allowable limit for quoting exchange rate also released yesterday, the CBN stated: “The circular with reference TED/FEM/PUB/FPC/001/009 dated September 13, 2023, states that IMTOs are required to quote rates within an allowable limit of – 2.5 per cent to +2.5 per cent around the previous day’s closing rate of the Nigerian foreign exchange market.

“However, in line with the CBN’s commitment to liberalise the Nigerian foreign exchange market, IMTOs are hereby allowed to quote exchange rates for naira payout to beneficiaries based on the prevailing market rates at the Nigerian foreign exchange market on a willing seller, willing buyer basis.

“For the avoidance of doubt, by this circular, the cap on allowable limit of -2.5 per cent to +2.5 per cent around the previous day’s closing rate of the Nigerian foreign exchange market is hereby removed.

“Therefore, this particular circular supersedes the circular with reference TED/FEM/PUB/FPC/001/009 dated September 13, 2023.”

It urged authorised dealers, IMTOs and the public to comply accordingly.

Analysts believed that the latest regulatory intervention on the NOP by the apex bank would ensure that banks that had been buying FX, holding onto it, and betting that the naira would continue to depreciate sold it to their customers in dire need of foreign currency within 24 hours to meet the new CBN prudential guidelines.

The move was also expected to ease pressure on the black market, improve transparency, as well as restore confidence in the FX market.

A report by Comercio Partners said the new regulatory initiative by the CBN underscored its proactive approach to addressing mounting concerns related to excessive foreign currency speculation and hoarding practices observed within Nigerian banks.

Specifically, the report stated that adjustment in NOP could lead to a sudden influx of forex into the market, as banks liquidated their net long positions, adding that increased supply of foreign currency may put downward pressure on its value in the short term.

According to the Lagos-based financial advisory and investment company, “The circular intends to discourage speculative activities and encourage banks to sell forex into the market.

“If banks comply, it could lead to an immediate reprieve for the forex market and potentially trigger currency appreciation. Investors might witness a strengthening of the local currency against major foreign currencies, including the dollar.”

The report also said the measures could impact banks’ profitability.

It stated, “Banks in Nigeria have been profiting from forex revaluation gains. The new regulations may impact their profitability, especially if they are holding significant net-long positions that need to be liquidated.

“Banks may need to adjust their strategies to comply with the guidelines, affecting their revenue streams.”

In addition, the report stated that currency appreciation resulting from banks complying with the circular could contribute to overall economic stability, as a more stable forex market enhanced predictability for businesses, investors and consumers, fostering a favourable economic environment.

It added, “The CBN’s circular is a significant regulatory intervention aimed at curbing speculative practices in the banking sector. The impact on liquidity and the economy will depend on the extent to which banks comply with the guidelines and how swiftly the market adjusts to the new regulations.

“In the coming days, it is crucial to closely monitor market reactions, compliance levels among banks, and any potential ripple effects on broader economic indicators.”

Similarly, providing more context into the reasons behind the apex bank’s latest regulatory intervention in the market, Founder of Nairametrics, Mr. Ugochukwu Obi-Chukwu, said CBN was mainly seeking to address demand and supply challenges, which had caused FX to weaken below the parallel market rate recently.

Writing on his Instagram page, Obi-Chukwu likened the situation to that of an egg and chicken, adding that the central bank cannot address only the demand equation without the supply side.

Obi-Chukwu explained that to improve supply, CBN sought to retrieve FX being hoarded and which ought to come into the official market.

According to him, banks appear to be profiting from FX devaluation, a situation that poses risks to the economy.

He said bank were holding NOP longer than expected, as they exploited FX depreciation and profit with currency depreciation, further constituting downside risks to the banks as well.

Obi-Chukwu said the apex bank believed that a lot of banks were buying FX from probably the CBN or elsewhere, and holding the foreign currency longer than the central bank thought. They then probably waited till the exchange rate depreciated before they sold.

The Nairametrics founder said, “So, imagine a bank just buys a $1 million at N1,000, knowing full well that it’s likely to depreciate to N1,100 – so, for every N1 depreciation, the bank is essentially making N1 million for N1 depreciation.

“The CBN thinks banks are doing this and, in their view, hurting supply in the economy by holding those long positions; and for the CBN it’s kind of speculative.

“The circular addresses that and they are telling them they are not going to be allowed to hold those positions any longer.”

Obi-Chukwu added, “Essentially, CBN seems to be reining in one area they feel it’s limiting supply in the market, which is that some banks may be hoarding FX.”

On the likely effect of the policy, Obi-Chukwu said, “You might see temporary appreciation of the naira; because if NOP is significant, you might see a lot of banks wanting to sell so they can comply with CBN regulations.

“The challenge I have, however, is that nobody knows how much it is and how much impact it would create. It’s not clear whether it is a significant amount to clear the demand that we are seeing.

“But, of course, as you would always know, whenever exchange rate depreciates farther like this, there are somethings that come up and it appreciates again.”

Analysts, who spoke with THISDAY, further pointed out that the CBN measures might prove positive for FX liquidity in the market, as banks would have to sell the excess on the margins on foreign currency balance sheet to the market going forward.

“Hence, banks will start selling internally and for internal transactions, such as converting FCY loans to NGN,” a source told THISDAY.

It added, “However, some banks might have the position on their balance sheet but it is unlikely that they have the liquidity. We, however, estimate that $4 billion to $6 billion could flow to the market as banks reduce their NOP to zero per cent.”

Senate Summons CBN Governor on State of Economy, Naira Free Fall

The Senate Committee on Banking, Insurance and other Financial Institutions summoned Cardoso to address it on the state of the economy and the national currency.

The panel said Cardoso must appear before it next Tuesday.

Chairman of the committee, Senator Adetokunbo Abiru (APC Lagos East), announced the summons yesterday, when his panel held an emergency meeting to address the situation of the nation’s currency, which had fallen to N1, 530 to a US dollar on the parallel market.

Speaking with journalists after the meeting held behind closed doors, Abiru said the state of the economy, especially the inflation index, was of great concern to the lawmakers.

He said, “We have held a meeting this afternoon essentially to focus on the direction of the Nigerian economy.

“We are all living witnesses to what is going on. Underlining the major issue of the economy is the way the inflation index has been and, of course, it is a major concern to us.

“We have deliberated among ourselves. Critical issues were addressed and we believe that the next line of action is to summon the CBN governor.

“He is expected to appear on Tuesday at 3pm to brief us properly on the state of the economy and the way forward.

“That we have resolved and will communicate to the governor of the central bank after which we will have further communication with members of the press.”


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