CBN directs banks to stop spending FX revaluation gains

The Central Bank of Nigeria (CBN) has issued a directive to commercial banks, instructing them to refrain from utilizing foreign exchange (FX) revaluation gains for dividends and operational expenditures. In a bid to ensure financial stability and safeguard against potential adverse rate fluctuations, the CBN emphasized that FX revaluation gains must be maintained as a counter-cyclical buffer. Johnson Chukwu, the CEO of Cowry Asset Management, provided insights on this directive in a recent interview with CNBC Africa. The directive from the CBN has sparked discussions and raised concerns within the financial sector. Chukwu pointed out some critical aspects that the CBN should consider in its regulatory approach. He questioned the underlying assumption that the current currency devaluation trend would quickly reverse, highlighting the need for a realistic assessment of the exchange rate trajectory. Chukwu delved into the concept of revaluation gains, explaining that banks with asset positions exceeding their liabilities in a foreign currency stand to benefit from exchange rate movements. However, he noted that sustainability of such gains hinges on maintaining a stable balance between assets and liabilities. The discussion with Chukwu underscored the significance of strategic decision-making by banks regarding their foreign exchange exposures. The CBN's restriction on utilizing revaluation gains for dividends and expenses implies a cautious approach to potential currency fluctuations. Chukwu emphasized the importance of aligning banking practices with prevailing market dynamics and anticipating future exchange rate scenarios. Chukwu's assessment extended to broader monetary policies and regulatory frameworks in Nigeria. He highlighted the need for a proactive rather than reactive approach to economic challenges. Critically evaluating the impact of policy measures and ensuring comprehensive guidelines are pivotal for effective financial governance. Amid ongoing reforms and regulatory adjustments, Chukwu emphasized the importance of careful consideration and holistic evaluation of policy implications. He raised concerns regarding the absence of specific timelines for regulatory forbearance on financial metrics like single obligation limits and non-performing loans. The conversation also delved into the potential of automation and digitalization in enhancing capital repatriation processes. Chukwu acknowledged the role of technology in optimizing foreign exchange transactions and minimizing disparities between official and parallel market rates. By streamlining exchange mechanisms and enhancing transparency, the financial ecosystem could attract more foreign investment and reinforce capital inflows. Addressing the challenges of capital repatriation backlogs, Chukwu advocated for strategic risk management strategies. With significant repatriation obligations amounting to billions of dollars, he underscored the importance of exploring funding sources to meet these financial commitments. Collaboration with multilateral agencies or bilateral partners could provide essential liquidity to address outstanding repatriation demands. In light of the evolving financial landscape in Nigeria, Chukwu emphasized the need for proactive measures to strengthen the country's economic resilience and attract foreign investments. Effective risk management, strategic policy formulation, and alignment with global financial standards are crucial for navigating complexities in the financial sector. As regulatory directives continue to shape banking practices, stakeholders must adapt to dynamic market conditions and prioritize stability and sustainability in their operations.