With these two announcements from FMDQ Exchange and CBN, the ground was watered for the next CBN circular on foreign currency exposure of banks.

CBN CIRCULAR 2

The CBN on 31st January, 2024 released a second circular on the HARMONISATION OF REPORTING REQUIREMENTS ON FOREIGN CURRENCY EXPOSURE OF BANKS.

This in lay man’s interpretation is CBN simply trying to mandate banks to sell around $7 billion kept by them in long currency positions to customers. This circular mandates that banks must adhere to a Net Open Position (NOP) limit, ensuring it does not surpass 20% short (i.e. holding more foreign currency assets than liabilities by more than 20%) or 0% long (i.e. not holding more foreign currency assets than the bank’s shareholder funds unimpaired by losses).

The immediate impact was an expected increase in forex liquidity in the market. Many banks instead of selling FX to customers who need them, would rather ‘hoard’ the dollars and hope that the scarcity will drive up the value. This is why many of these banks have been declaring huge earnings/profits. They excessively bet on a weakening of the Naira. Germany link insertion sites list.

CBN CIRCULAR 3

After limiting the foreign currency exposure of banks and forcing them to offload their excess dollars into the official market (at rates now at par with the parallel market rates) the CBN now turned its focus to the International Money Transfer Operators (IMTO) with its third circular in 48 hours. This time around, the CBN announced the removal of allowable limit of exchange rate quoted by IMTOs with the target being to draw the around $24 billion annual diaspora remittances under the umbrella of the official foreign exchange market.

The reason for this move by the CBN is simple: the apex bank saw that despite the huge diaspora remittances into Nigeria, very little of it finds its way into the official foreign exchange market with the majority of the dollars remaining offshore after the IMTOs convert the FX to Naira. Part of the reason for this practice is that the rates to be quoted by the IMTOs were capped within a band of +/- 2.5% of the prevailing NAFEX rate (official FX market rate). In other words, before now the money transfer operators were required to quote rates within an allowable limit if – 2.5% to +2.5% around the previous day’s closing rate of the official foreign exchange market.

Before July 10, 2023, recipients of diaspora remittances through CBN-approved IMTOs did not have Naira as a payout option rather it was mostly USD and eNaira. The CBN had in November 2020 mandated that all remittances from the diaspora into Nigeria must be paid to the Nigerian recipients in US dollars. The aim was to shore up Nigeria’s foreign reserve by leveraging on inflows from diaspora remittances. The CBN however reversed that policy in a July 10, 2023 circular which allowed the 62 IMTOs approved by the CBN to settle recipients of remittances in Naira but insisted that the exchange rate must be the prevailing rate at the official market on the day of transaction. Nigeria Best Web developer and web designer

The money transfer operators flouted the CBN directives and rather engaged in arbitrary rate quotes outside the – 2.5% to +2.5% permissible limit imposed by the CBN. In a September 13 circular, the CBN frowned at the sharp practices and threatened various sanctions against IMTOs who are in breach of the allowable limit regulations while providing international money transfer services in the country. Many of these IMTOs decided instead to be settling conversion transactions from USD to Naira offshore to bypass the CBN allowable limit regulation. This meant diaspora remittance inflows into the official foreign exchange market dried up.

In an attempt to reverse that trend, the CBN under Yemi Cardoso by these recent circulars have now removed that cap on quoted rate for the IMTOs. They can now quote exchange rates for Naira payouts to beneficiaries based on the prevailing market rates at the NAFEM on a willing seller, willing buyer basis. This means, NO LIMIT. The rate is at the mercy of the interplay of forces of demand and supply. The CBN simply wants to remove all controls that limit the FX rate and allow market forces determine the swing direction of the Naira. A tricky situation, but one that potentially have significant benefits too for our macroeconomic stability.

By literally fighting ‘dirty’ with the parallel market, Cardoso is seeking to rechannel FX from the parallel market into the unified official foreign exchange market (the NAFEM). This will ensure enough liquidity in the official market and when that happens, the forces of demand and supply will certainly help the Naira find its true market value that is stable and not dictated by intense currency speculation, which had been the major cause of the highly volatile exchange rate in recent times.

It is a very delicate chess game that Cardoso is playing but one he needed to play, since all previous control measures to stabilise the currency has not yielded the desired goals. However, there is cause to expect better results this time around. With the IMTOs move, there is a real possibility of more liquidity flowing into the NAFEM from diaspora remittances since in the short term, oil export revenue won’t be enough to add the needed liquidity while non-oil export earnings on the other hand is low (around $4.5 billion in 2023). The CBN fight for Naira stability will eventually be complemented by an expected upsurge in the foreign reserve when Nigeria ceases the importation of petroleum products once Dangote refinery achieves full production.

Nigeria spends around 38% of its dollar earnings to import petroleum products. In 2022, goods worth $53.61 billion was imported into Nigeria out of which $21.47 billion was expended on importation of petroleum products alone. In the same 2022, $56.1 billion was our total export earnings out of which $44.2 billion came from crude oil export. Therefore if we eventually remove our petroleum import burden with the coming of Dangote refinery, it will massively swell our foreign reserve and enhance the CBN’s ability to provide dollar liquidity in the FX market for imports. That of course is the medium to long term outlook.

The February 26th to 27th MPC meeting will be very interesting and industry watchers would be eager to know which World health news agency other move Cardoso will make in this increasingly desperate battle of wits and will. However one thing is becoming obvious, in this Cardoso Naira vs Dollar monetary chess game, it is a fight to the finish!