The foreign exchange (FX) market is experiencing a gradual relief as the naira rebounds, following commercial banks’ off-loading the dollars into the official market in response to the 24-hour ultimatum issued by the Central Bank of Nigeria (CBN).
On Wednesday, the CBN implemented limits on banks’ foreign currency holdings and expressed worry about the increasing forex exposures on their balance sheets, prompted by the depreciation of the local currency against the U.S. dollar.
The information was revealed in a circular titled ‘Harmonization of Reporting Requirements on Foreign Currency Exposures of Banks.’ This circular, jointly signed by Hassan Mahmud, Director of the Trade and Exchange Department of the CBN, and Rita Ijeoma Sike, acting on behalf of the Director of Banking Supervision Department, was addressed to all banks.
According to the circular, banks are required to comply to a Net Open Position (NOP) limit, ensuring it does not exceed 20 percent short (holding more foreign currency assets than liabilities) or 0 percent long (not holding more foreign currency assets than the bank’s shareholder funds unimpaired by losses).
The circular stated that banks presently surpassing the specified NOP limits must realign their positions to comply with the new regulations by February 1, 2024. The objective of this initiative is to reduce the risks linked to excessive foreign currency exposure and promote greater resilience in the banking sector.
NOP represents the difference between a bank’s foreign currency assets and liabilities, encompassing both on-balance sheet and off-balance sheet items. As a result, commercial banks offloaded dollars into the official market. This was observed as the volume of dollar transactions, involving willing buyers and sellers such as banks, exporters, and investors, surged by 85.36 percent.
The daily turnover in the FX market rose to $134.07 million on Wednesday, marking an increase from the $72.33 million recorded on Tuesday in the official market.
As a result, the Naira appreciated by 1.85 percent, with the dollar quoted at N1,455.59 on Wednesday, compared to the N1,482.57 quoted on Tuesday at the Nigerian Autonomous Foreign Exchange Market (NAFEM), according to data from the FMDQ. The intraday high increased by 1.46 percent to N1,509 on Wednesday compared to the rate of N1,531 recorded on Tuesday. The intraday low remained stable at N789 per dollar.
