The Nigerian foreign exchange (FX) market has shown signs of recovery, with the naira strengthening as commercial banks begin to release their dollar holdings into the official market. This development follows a 24-hour ultimatum issued by the Central Bank of Nigeria (CBN), prompting banks to offload excess dollars.
On Wednesday, the CBN took decisive action to curb the growing foreign currency exposure among Nigerian banks, which had been exacerbating the depreciation of the naira. In response, the CBN imposed limits on the amount of foreign currency banks can hold. The regulator expressed concerns over the rising imbalance in banks’ foreign currency portfolios, driven by the naira’s weakening against the U.S. dollar.
This new policy was outlined in a directive titled “Harmonization of Reporting Requirements on Foreign Currency Exposures of Banks,” signed by Hassan Mahmud, Director of the Trade and Exchange Department at the CBN, and Rita Ijeoma Sike, acting on behalf of the Director of the Banking Supervision Department. The circular, sent to all banks, stipulates that banks must adjust their foreign currency holdings to align with the Net Open Position (NOP) limits. Specifically, banks are now required to ensure that their NOP does not exceed a 20 percent short position (holding more foreign currency assets than liabilities) or a 0 percent long position (not holding more foreign currency assets than their unimpaired shareholder funds).
The new regulation is designed to mitigate the risks of excessive foreign currency exposure and enhance the stability of the banking sector. Banks that currently exceed these NOP thresholds have been instructed to realign their positions by February 1, 2024, to comply with the updated rules.
As a result of this directive, banks have started to offload dollars into the official market, helping boost liquidity and improve market conditions. The volume of dollar transactions surged by an impressive 85.36 percent, driven by active participation from banks, exporters, and investors. The daily turnover in the FX market jumped to $134.07 million on Wednesday, a substantial increase from the $72.33 million recorded the previous day.
This influx of dollars into the market contributed to a notable strengthening of the naira, which appreciated by 1.85 percent. The dollar was quoted at N1,455.59 on Wednesday, down from N1,482.57 on Tuesday, according to data from the FMDQ. The intraday high also saw a rise of 1.46 percent, reaching N1,509 compared to N1,531 the day before. However, the intraday low remained steady at N789 per dollar.
