CBN bars banks from holding funds in dollars

CBN Governor, Mr. Godwin Emefiele

The Central Bank of Nigeria has barred commercial banks from holding any part of their funds in United State dollars as it steps up efforts to reduce pressure on the naira.

The CBN, in a circulated dated December 17, 2014, ordered the banks to stop keeping one per cent of their shareholders’ funds in dollars as foreign exchange trading position at the close of each business day.

The move, according to the CBN, is meant to reduce the volatility being experienced in the naira-dollar exchange rate.

The circular, signed by the Director, Trade Exchange, CBN, Mr. Olakanmi Gbadamosi, read, “The CBN has observed the recent development in the foreign exchange market and its consequences on the stability of the exchange rate. In order to preserve the stability of the market, the foreign exchange trading position of individual authorised dealer, which is currently at one per cent of its shareholders’ fund unimpaired by losses, has been temporarily reviewed downward to zero per cent with immediate effect.

“Consequently, authorised dealers are therefore required to maintain zero per cent of their shareholders’ fund as foreign exchange trading position at the close of each business day. Any infraction of the requirement of this circular, in any way whatsoever, will attract appropriate sanctions, which may include suspension from the foreign exchange market.”

The CBN believes commercial banks are contributing to the continued fall of the naira by speculating against the naira through their dollar stocks.

This, it was learnt, informed the central bank’s decision to stop the banks from holding dollars. Close to $1bn will be withdrawn from the custody of the banks through the measure, according to analysts.

The Governor, CBN, Mr. Godwin Emefiele, had reiterated that the central bank was not going back on the latest decision, adding that it would not tolerate speculation against the ailing naira.

“We do not want speculators in this market any longer. The banks are not supposed to hold any funds (in dollars) of their own. They are supposed to buy and sell currency on behalf of customers,” he said.

In a related development, the CBN on Thursday asked banks and members of the general public, who purchase dollar at the interbank forex market, to ensure that they utilised it within 48 hours.

A separate circular posted on the bank’s website read, “We write to inform all authorised dealers and the general public that with effect from the date of this circular, funds purchased by banks/ customers at the interbank forex market must be utilised within 48 hours from the date of purchase, failing which they should be returned to the CBN for repurchase at the bank’s buying rate.”

Analysts said the new measures by the CBN would be counterproductive and might not save the naira from further fall

Currency strategist at Ecobank Nigeria, Mr. Kunle Ezun, wrote in an economic note, “By this new foreign exchange regulation, inter-bank market liquidity is eroded, thereby creating a non-competitive market devoid of price transparency and discovery. Tightening the conditions that allow access to the dollar, while making no changes to how foreign exchange is supplied will further heighten the naira volatility.

“Overall, the circular will create more volatility that will require another set of CBN circulars to address the dollar supply and demand bottlenecks. As such, we expect the naira to trade between 190 and 195.”

The naira has been battered in recent months by plunging oil prices. Despite heavy intervention in the market, the central bank has failed to keep the currency in the new band it set on November 25 when it devalued the currency by eight per cent in a bid to halt the slide its foreign exchange reserves.

On whether the CBN might be forced to devalue the naira again owing the continued fall in its value, Emefiele told Reuters, “As the need arises, action will be taken. But we believe the currency is appropriately priced at this time.”

The naira fell to a record low of 188.85 to the dollar after the governor’s comments, well outside the bank’s target band.

The weak naira will also probably fuel inflation, which has been stable in single digits for two years. The impact on inflation is expected to be felt in January.

SOURCE: THE PUNCH