Nigeria’s FX Reserve Dip $608.9m To $34.04bn In One Month After Naira Float
Nigeria’s foreign reserve depreciated by 1.8 percent or $608.9 million to $34.04 billion at the close of transactions on Friday, July 14, down from $34.65 billion on June 14, 2023, when the Central Bank of Nigeria (CBN) floated the local currency.
On a week-on-week basis, the foreign reserve decreased by $2.01 million to $34.06 billion on July 12, signifying that the CBN might still be drawing down on the reserve to meet dollar obligations with little or no accretion.
With the floating of the local currency on June 14, the general expectation of financial market analysts and operators is to see more accretion to the reserve rather than depletion.
However, the movement in reserve management as captured by the CBN website showed a regular drawdown, indicating intense pressure on the country’s lean reserve.
In the two weeks of July, the reserve management recorded a slight increase twice on July 4 (from $34.019bn to $34.087bn) but could not be sustained following more depletion to $34.059bn on July 6 before a slight increase to $34.062bn on July 7 and $34.080bn on July 10.
Since July 11, the foreign reserve has been on a steady decline culminating in a total drawdown of $608.9 million in one month.
In other words, the floating of the local currency has not impacted positively on the country’s capacity to retain foreign exchange accruals, even though the apex bank has ended almost a decade of Naira defense using the foreign exchange largely drawn from the foreign reserve.
The CBN had opted for what it called “managed float” in its new monetary policy thrust, implying that the Naira exchange rate could still be supported through interventions when the need arises.
Reviewing the development with InsideBusinessNG, financial analysts offered likely explanations for the continued depletion in foreign reserves against all expectations.
Muda Yusuf offered a couple of reasons that could explain the drawdown including the recent settlement of a maturing Eurobond loan to the tune of $500 million, and unmet obligations that were outstanding before the floatation of the Naira.
“There were huge unmet dollar demands which had put demand pressure on the official foreign exchange market before CBN floated the Naira. It could be that those demands are gradually being settled by the CBN.
“But the other possibility is that very recently the government had to pay off maturing Eurobond debt, $500 million. That could be an issue because if you have such very important debt to settle, you have to pay it all from your reserve,” said the Director of the Centre for Promotion of Private Enterprise.
Corroborating
Yusuf’s explanation, David Adonri, Principal Partner of Highcap Securities Limited, attributed it to the government’s recent settlement of a due Eurobond obligation.
“You know, last week, the government settled a due Euro-bond obligation up to the tune of $500 million. That could be the reason for the depletion,” said the investment expert.
The federal government has recently fulfilled its debt service obligations by redeeming a $500 million Eurobond on its scheduled due date of July 12, 2023.
The bond was obtained five years ago at a coupon rate of 6.375 percent per annum. Eurobond debts are typically paid out of the country’s external reserves or via a special fund designated for external bond repayments.
According to the DMO, with the latest $500 million Eurobond redemption, Nigeria has now repaid a total of $1.8 billion in securities in the International Capital Market (ICM) over the past six years.
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