Naira gains as banks offload dollars into FX market

The pressure on the foreign exchange (FX) market is beginning to ease as the naira recovered after commercial banks offloaded dollars into the official market in response to 24 hours given by the Central Bank of Nigeria (CBN).

This was seen as the volume of dollar transactions by willing buyers and willing sellers, consisting of banks, exporters and investors, increased by 85.36 percent.

The daily FX market turnover increased to $134.07 million on Wednesday from $72.33 million recorded on Tuesday at the official market.

Consequently, Naira gained 1.85 percent as the dollar was quoted at N,1455.59 on Wednesday compared to N1,482.57 quoted on Tuesday at the Nigerian Autonomous Foreign Exchange Market (NAFEM), data from the FMDQ indicated.

Also, the intraday high appreciated by 1.46 percent to N1,509 on Wednesday as against N1,531 quoted on the spot on Tuesday. The intraday low steadied at N789 per dollar.

On Wednesday, the CBN announced limits on how much banks can hold in foreign currencies and expressed concern about the growth of forex exposures on their balance sheets after the local currency tumbled against the U.S. dollar.

This was disclosed in a circular to all banks, titled ‘Harmonisation of Reporting Requirements on Foreign Currency Exposures of Banks’ jointly signed by Hassan Mahmud, director of the trade and exchange department of the CBN and Rita Ijeoma Sike, for the director of banking supervision department.

The circular mandates that banks must adhere to a Ne Open Position (NOP) limit, ensuring it does not surpass 20 percent short (holding more foreign currency assets than liabilities) or 0% long (not holding more foreign currency assets than the bank’s shareholder funds unimpaired by losses).

It said banks currently exceeding these prescribed NOP limits are obligated to adjust their positions to align with the new regulations by February 1, 2024.

This move aims to mitigate risks associated with excessive foreign currency exposure and foster a more resilient banking sector.

NOP is the difference between a bank’s foreign currency assets and liabilities. This includes both on-balance sheet and off-balance sheet items.

Analysts are optimistic that the new FX rules by the apex bank would shore up dollar supply from commercial banks and stabilise naira in the immediate terms,

“This would increase the supply of foreign currency to the market and moderate the demand/supply gap. Whilst the effect of this policy on the Naira would be one-off and transitory, it should help calm the pressure in the market and stabilize the Naira over the next few days, especially if the CBN follows through the policy with strong oversight to avoid infractions or disguised compliance,” Abiola Rasaq, former economist and head investor relations for United Bank for Africa Plc said.