Victor EzejaEconomic analysts have expressed optimism that the latest policy measures issued by the Central Bank of Nigeria will have a positive impact on the foreign exchange market and the economy in general.
The Central Bank of Nigeria (CBN), on Wednesday, 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 percent short or zero percent long of shareholders’ funds unimpaired by losses using the gross aggregate method.
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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 the allowable limit of exchange rate quoted by the International Money Transfer Operators (IMTOs).
The apex bank expressed concerns over the growth in foreign currency exposures of banks through their NOP.
The naira on Wednesday reached an all-time low of N1, 530/$1 on the parallel market. At the official window, it closed at N1, 455.59/$1 on Wednesday, gaining N26.98, compared to the N1, 482.57/$ recorded on Tuesday.
The move by the apex bank is, according to analysts, also aimed at curtailing foreign currency speculation in the FX market.
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They believe that the apex bank’s latest regulatory action on the NOP would guarantee that banks that had been purchasing foreign exchange, holding onto it, and gambling that the naira would continue to weaken sold it to their customers in urgent need of foreign money within 24 hours in order to comply with the new CBN prudential guidelines.
According to a report by Comercio Partners, a Lagos-based financial advisory and investment company, the latest regulatory effort by the CBN, demonstrated its proactive approach to addressing growing concerns about excessive foreign currency speculation and hoarding behaviors observed within Nigerian banks.
The report averred that if banks liquidated their net long positions, a rapid rush of foreign currency supply may be witnessed in the market as a result of the NOP adjustment. It also added that an increase in the supply of foreign currency could temporarily lower its value.
“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 financial advisory firm’s report said.
The regulations, according to the report, might have an effect on banks’ profits.
“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,” it said.
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.
Also analysing the impact of the CBN’s latest policy decision, Dumebi Oluwole, Senior Economist at FDC & Stears, explained that What the CBN is trying to do with that particular directive is to help the banks hedge against foreign exchange losses and also reduce pressure in the FX market like demand outweighing supply.
“The CBN is trying to help the banks hedge against foreign exchange losses. What it is doing is to reduce bank’s exposure to forex losses because the Net Open balance of a bank at that particular point in time is pretty easy to lose when you start the trading day.
“When you look at the activities that happened in the FMDQ market you will realise that banks are pretty much the largest players in that market,” Oluwole, who appeared on Channels TV Business Morning programme on Thursday stated.
She said the new methodology adopted by FMDQ for reporting foreign exchange will reflect market realities.
She asserted that what the CBN is trying to do as communicated in the circular released on Wednesday is to reduce the demand for dollar at the official window.
On the benefits of the latest CBN measures on Forex she stated that it will help in achieving market convergence (between parallel and official window) and a more transparent market rate.
“We should see an increase in FX transactions because now, it should be easier to get at the market official rate. The arbitrage opportunity has significantly declined because literally, you will get at the same rate at the parallel market as it is if you go to the commercial banks,” the economic analyst stated.
She noted that the major problem with Forex is dollar illiquidity (shortage of dollar supply to the FX market).
She added that the CBN is also trying to instill investor confidence to address the issue of the decline in foreign investment in the country.
The economic expert also advised that the authorities should avoid what she called “policy contradictions” that could manifest in the form of increasing interest rates and allowing the money supply to keep increasing. “That way, you are contradicting your policy moves and it then sends conflicting signals to the market,” Oluwole warned.
Food Inflation
Oluwole pointed out that two things driving food inflation are the exchange rate and low agricultural productivity. She said the government needs to address issues causing low agricultural productivity such as insecurity, and extreme weather conditions among others.
Victor Ezeja is a passionate journalist with six years of experience writing on economy, politics and energy. He holds a Masters degree in Mass Communication.
