FX liquidity seen as CBN lifts dom account restrictions

The foreign exchange market is expected to witness increased liquidity following the removal of restrictions on domiciliary accounts by the Central Bank of Nigeria (CBN), according to analysts.

The CBN had on Friday in a letter to all banks said cash deposits into domiciliary accounts would not be restricted, and that customers would have unfettered and unrestricted access to funds in their accounts.

The letter, signed by Haruna Mustafa, the CBN’s director, banking supervision department, said the new FX policy change aims to promote transparency, liquidity, and price discovery in the FX market in order to improve FX supply.

“Deposit money banks (DMBs) shall provide returns to the CBN including the purpose for such transactions. Cash deposits into domiciliary accounts will not be restricted, subject to DMBs conducting proper know your customers due diligence, and adhering to the spirit and letter of extant anti-money laundering/ combating the financing of terrorism laws and other relevant rules and regulations,” the letter said.

“This will also increase the available dollars in the financial system in the medium term and help support the naira,” said Ayodeji Ebo, managing director/chief business officer of Optimus by Afrinvest.

According to Taiwo Oyedele, head of tax and corporate advisory services at PwC Nigeria, an orderly relaxation of capital control and other forex restriction rules is a positive development to restore confidence and attract FX liquidity.

He said unfettered access to cash deposited in domiciliary accounts including the use via telegraphic transfers will ease economic activities involving foreign exchange. “Once naira exchange rate is stable, the incentive for currency speculators will disappear,” he said.

“The CBN should however relax its documentation requirements in the retail end of the forex market and reconsider its stance regarding the 43 restricted items otherwise there will be sustained excess demand in the parallel market which could make the rate move further away from the I&E window,” Oyedele said.

“I believe it will increase the FX liquidity in the market for eligible transactions,” Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited, said.

Uche Uwaleke, professor of Capital Market at the Nasarawa State University Keffi, said the development would enhance liquidity in the FX market as it “provides an incentive to operate domiciliary accounts”.

“With the restrictions lifted, there is likely to be an increase in remittances through formal channels,” he added.

The CBN has said it would prioritise orderly settlement of any committed FX forward transactions as they fall due in order to further boost market confidence.

It said all Business Travel Allowances, Personal Travel Allowances, international school fees, medical, airline remittances, and other visible and invisible transactions are eligible for foreign exchange at the Investor and Exporters (I&E) window.

The CBN directed all banks to ensure expeditious processing of all eligible invisible transactions on behalf of their customers using the applicable rates at the I&E window.

The banking sector regulator, last Wednesday, collapsed all segments of foreign exchange markets into the I&E FX window.

Members of the Monetary Policy Committee (MPC) had late last year called on the central bank to carry out a bold reform of the FX market, particularly, the operation of Foreign Currency Domiciliary Accounts (FCDA) by Individuals.

Mike Obadan Mike, a member of the MPC, made the call in his personal statement at the monetary policy committee meeting in November 2022.

He said these accounts have tended to be grossly abused in recent years to the detriment of exchange rate stability, adding that exporting firms that maintain FCDAs must be effectively monitored.