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New CBN policy raises hope of FX liquidity boost



Appetite for all things foreign to blame for naira collapse, $98bn spent on medical tourism, others in 10 years - CBN 

Early effects of latest policy steps by the Central Bank of Nigeria (CBN) against alleged excessive foreign currency speculation and hoarding by banks suggest that the move may be the game-changer in the nation’s strive to achieve foreign exchange stability, if compliance is thoroughly enforced.

It was learnt that ahead of the midnight February 1, 2024 deadline given by the CBN to the lenders to sell all excess foreign exchange holdings, Deposit Money Banks (DMBs) on Thursday made frantic efforts to offload their surplus dollar stocks.

The situation was said to have seen the treasury departments of the DMBs spend the entire day battling to sell their excess FX holdings, with officials processing several foreign exchange request forms of their customers.

The increase in the level of forex sale activities at the official foreign exchange market, it was learnt, led to the rebound of the naira at the parallel market on Thursday and continued on Friday.

The banking sector regulator had, in fresh moves to stabilise the nation’s volatile exchange rate, ordered the DMBs through a circular released on Wednesday to sell their excess dollar stocks latest February 1, 2024. The CBN also warned lenders against hoarding excess foreign currencies for profit.

According to officials, the central bank believes some commercial banks hold long-term foreign exchange positions to enable them to profit from the volatile movements of exchange rates. The new circular introduced a set of guidelines aimed at reducing the risks associated with these practices.

In the circular titled, “Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks”, the CBN raised concerns over the growing trend of banks holding large foreign currency positions.

The circular read in parts, “The Central Bank of Nigeria has noted with concern the growth in foreign currency exposures of banks through their Net Open Position (NOP). This has created an incentive for banks to hold excess long foreign currency positions, which exposes banks to foreign exchange and other risks.”

The apex bank further directed banks with current NOPs exceeding its limits to adjust their positions and comply with the new regulations by February 1, 2024. The latest circular came barely 48 hours after the CBN released a circular, warning banks and FX dealers against reporting false exchange rates among others.

The new development came on the heels of the adjustment of the methodology used for the calculation of the nation’s official exchange rate by the FMDQ Exchange, a situation that has moved the official exchange rate to about N1,500 from around N900/dollar.

Following the latest CBN directive, which is aimed at unifying the official and parallel market rates of the local unit, several banks sold forex to their customers on Thursday.

The development led to a sharp rebound of the national currency in the official market. Bureau De Change operators in Lagos, Kano, and Abuja also pushed to sell their dollar holding to avert losses should the local unit sustain the gain in coming days.


Instant offshoot


Little wonder the naira saw an uptick, reaching N1,440 per dollar on Friday, a further improvement on N1,450 per dollar in a sudden rebound that started on Thursday. It also experienced appreciation to N1,435.53 per dollar in the Nigerian Foreign Exchange Market (NAFEM).


Data from FMDQ on Friday showed that the indicative exchange rate for NAFEM fell to N1,435.53 per dollar from N1,461.9 per dollar on Thursday, indicating N26.37 appreciation for the naira. Consequently, the gap between the official and parallel market exchange rates narrowed to N4.47 per dollar on Friday from N11.9 per dollar on Thursday.

The naira entered into fresh trouble last June, when the CBN, implementing the directive of President Bola Tinubu, initiated the unification of the naira rates, signaling the end of its control of the forex market. Since then, the exchange rate of the currency has been determined by market forces, with an accelerated slide analysts attribute to a policy not based on sound economics.

Five months ago, the dollar first crossed N1,000 in the parallel market. Despite receiving a $2.25 billion support from AfreximBank recently and the claim that the CBN had improved the clearing of forex obligations aimed at bolstering the market, the depreciation of the naira continued to worsen.


Way to go


A capital market analyst, David Adonri, believes that to curb the huge disparity between the official and the parallel market, the Federal Government should organize a single foreign exchange market for operators in the country.

Speaking with journalists, Adnori stated that the unification of parallel and official into a single market will show a genuinely floated and liberated FX market that will shore up the value of naira.

“In a case of floatation, the market mechanism determines the price and in this case, the market will be subjected to demand and supply. That’s why we are saying it’s a misnomer to have a dichotomy where we have an official and parallel market operating in silos”, Adonri, who is the Executive Vice Chairman of Highcap Securities Limited, stated.

He speaks further:‘ ’The responsibility of the government or the monetary authority that controls the monetary policy should be to organize a single and perfect market wherein all economic elements in the economy will be participants.

“So, if you have a market-based exchange, which is currently occurring a little bit on FMDQ as it is only for official market activities but, this one I am calling for should incorporate BDC and other economic elements.

“If the Central Bank of Nigeria and other stakeholders are able to come together to properly constitute a proper FX market that will constitute a single clearing rate at the end of the day, then we will have a genuinely floated naira where market mechanism determines the exchange rate.

On his part, a policy analyst, Dr. Peter Amos, argued that to enhance the naira value, government must cut the cost of governance and utilise monetary policy instruments properly. He said the Tinubu administration should commence the privatisation of the commanding heights of the economy, and galvanise local production.

Amos said, “Governments at all levels should make the country attractive to investors and boost the ease of business. This involves fixing the perennial electricity power crisis in the country.

“The binge borrowing by the Federal Government should stop and there should be commensurate efforts to intensify local food production and Small and Medium Scale Enterprises.”

Recently, the CBN governor, Olayemi Cardoso stated that the national currency was currently undervalued, and that the bank was working to stabilise the exchange rate.


He said, “In our efforts to stabilise the exchange rate, we must prioritise transparency and create a market environment that creates a fair determination of exchange rates ensuring stability for businesses and individuals alike.”

However, the Senate Committee on Banking, Insurance and Other Financial Institutions, has summoned the CBN helmsman to appear before it on Tuesday (tomorrow) to answer questions on the state of the economy and the free fall of the naira.


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