Following a decline in the value of the local currency relative to the US dollar, Nigeria’s central bank placed restrictions on the amount of foreign exchange that banks may retain on Wednesday. It also voiced concerns about the rise in forex exposures on banks’ balance sheets.
Tuesday’s record low for Nigeria’s currency on the official market came after market regulator FMDQ Exchange modified how it calculates the naira’s closing rate. It also dropped below the rate on the unauthorized parallel market.
Laptops 1000Sharp declines also occurred in its sovereign bonds denominated in dollars.
The monetary authority stated in a circular on Wednesday that the central bank has imposed limits on lenders’ net open positions, setting a zero limit for long holdings and a 20% restriction for short positions. It has also instructed banks to standardize reporting.
Lenders were previously prohibited from holding open positions on the dollar, which meant they were unable to speculate on the value of the currency or purchase foreign exchange on their account from the market.
The supervisor claimed that excessive net open dollar positions on banks’ balance sheets have encouraged lenders to keep foreign currency, putting them at risk for exchange rate fluctuations and other issues.
Laptops 1000It demanded that they promptly reduce their exposures to the predetermined levels, which meant that banks would have to liquidate their holdings or risk penalties, including exclusion from the currency market.
Before Nigeria’s currency problems, lenders could finance short-term trade lines without going through the central bank’s bidding process by using their open net positions on foreign currency.
Due to banks’ ability to essentially “make the market” for dollars and offer two-way quotes for buying and selling the currency, a fully operational foreign exchange market was established.
The central bank requested that banks have a foreign exchange contingency funding arrangement with other institutions and stated that lenders will need to have liquid foreign assets to satisfy maturing foreign currency liabilities.
It further stated that, in cases where such a redemption clause is relevant, banks will need permission before they can redeem their Eurobonds early.
