In another move to deepen the foreign exchange market and stabilize the naira, the Central Bank of Nigeria (CBN) has issued revised guidelines allowing Deposit Money Banks (DMBs) to deposit excess foreign currency notes at its branches in Lagos and Abuja.
This initiative aims to credit the banks’ offshore accounts with correspondent banks, aligning the exchange rates between the parallel and official markets.
The guidelines, detailed in a document signed by Solaja, Mohammed J. Olayemi, the Acting Director of the Currency Operations Department at the CBN, respond to the increasing demand from DMBs for streamlined forex cash management. This measure is anticipated to foster a more robust and liquid foreign exchange market, facilitating a stable and convergent exchange rate regime.
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According to the revised guidelines, DMBs are required to provide at least three working days’ notice before making any foreign currency deposits, accompanied by a detailed list of the currency owners.
Daily deposit limits are set, with a maximum of $10 million for higher denomination bills ($100 and $50) and $1 million for lower denomination bills ($20 and below). Similar limits apply to GBP and Euro deposits, capped at £1 million and €1 million, respectively. To ensure transparency, two representatives from each depositing bank must be present to witness the deposit process.
Deposits must be made in specific denominations and stored in separate boxes to facilitate counting and authentication. Security is paramount, with DMBs required to use CBN-registered Cash-in-Transit (CIT) companies for the safe transport of foreign currency. Deposits will be accepted between 8 a.m. and 12 p.m., and processing will be completed on the same day.
The CBN will credit the DMBs’ offshore correspondent bank accounts within a cycle of T+5 days, deducting a handling charge of 0.30% from the bank’s current account. Non-compliance with these guidelines will result in the rejection of deposits.
The CBN’s initiative is expected to positively impact Nigeria’s foreign exchange market by boosting liquidity and aligning exchange rates between the parallel and official markets. Increased liquidity will help stabilize the naira, making more foreign currency available for legitimate transactions and reducing speculative activities that lead to exchange rate volatility.
This move comes amid growing concerns about the volatility in Nigeria’s foreign exchange market. Previously, the CBN had released a circular addressing cases of excessive foreign currency speculation and hoarding by Nigerian banks.
The circular mandated DMBs to sell their excess dollar stock by February 1, 2024, to stabilize the exchange rate, and stipulated that the Net Open Position (NOP) must not exceed 20% short or 0% long of the bank’s shareholders’ funds. The NOP measures the difference between a bank’s foreign currency assets and its foreign currency liabilities.
Previous measures by the CBN, under former Governor, Godwin Emefiele, did little to quell the FX market volatility. They included restrictions on FX access for certain imports to encourage local production, and the introduction of the “Naira for Dollar” scheme to incentivize diaspora remittances.
Current CBN governor, Yemi Cardoso, has equally announced a series of new guidelines, aimed at tackling the FX crisis. Despite these efforts, Bloomberg on Friday, reported the naira as the worst-performing currency in the world in the first half of 2024, reflecting the ongoing challenges in achieving exchange rate stability.
The lingering situation has been attributed to many factors, including speculation and foreign currency hoarding. Against this backdrop, the House of Representatives recently claimed that four banks were holding approximately $5 billion in surplus foreign exchange. In response, the House directed the joint Committees on Banking Regulations and Banking Institutions to conduct an investigative hearing into the failure of banks to adhere to CBN directives regarding NOP limits. The outcome of this probe is still awaited.
The CBN’s revised guidelines represent a significant step towards stabilizing Nigeria’s foreign exchange market. By allowing DMBs to deposit excess foreign currency notes, the CBN aims to enhance market liquidity and promote exchange rate convergence. This move, while addressing the immediate needs of DMBs for better forex cash management, also aims to curb speculative practices and foster a more stable FX market.