Nigeria’s Foreign Exchange Buffer Dips $3.13bn in Eight Months
Nigeria’s foreign exchange buffer was depleted by $3.13 billion between January and August of 2023, amid dwindling oil exports, and interventions in the foreign exchange market by the Central Bank of Nigeria (CBN).
The CBN in its data revealed that foreign reserves closed August 31, 2023, at $33.95 billion, a decline of $3.13 billion or 8.44 per cent from $37.08 billion it opened in 2023.
The foreign reserves dropped to $36billion in February and down further to $35billion in March.
In early June, it depreciated to $34 billion and reached the $33.99 billion mark on July 18, 2023.
Eventually, the foreign reserves gained $1.85 million in August despite the CBN’s sustained interventions in the foreign exchange market.
The vice President, of Highcap Securities Limited, David Adnori hinted that the depletion of the external reserves is due to the continuous currency intervention since the CBN still operates a floating managed peg exchange regime, external debt servicing for the second quarter (Q2) 2023 and the lower foreign exchange inflow from oil exports.
He added that “The country has struggled to meet the Organization of the Petroleum Exporting Countries (OPEC) oil production quota in the past few years, robbing the opportunity to benefit from elevated oil prices, which should shove up the external reserves.”
Despite the interventions, the naira against the dollar at the Investors & Exporters (I & E) Foreign Exchange market closed at N757.02 against the dollar from N448.05 against the dollar it closed in 2022.
Nigeria’s foreign reserves recently faced divergent opinions on the actual state, given that the CBN only publishes the gross foreign exchange reserves without comprehensive information on foreign exchange liabilities
Analysts at Cordros Research described the International Monetary Fund (IMF), reserve liabilities as all foreign exchange liabilities to residents and non-residents, including commitments to sell foreign exchange arising from derivatives (such as futures, forwards, swaps, and options) and all credit outstanding from the Fund.
“Also, the following are excluded from reserve assets: any assets that are pledged, collateralized, or otherwise encumbered, claims on residents, claims in foreign exchange arising from derivatives in foreign currencies vis-a-vis domestic currency (such as futures, forwards, swaps, and options), precious metals other than gold, assets in nonconvertible currencies, and illiquid assets.
“Based on the methods above and using data from the CBN’s 2022 financial statement, Table 1 represents our findings and estimates of (1) Nigeria’s international foreign exchange liquidity position and (2) net foreign reserves as of the end of 2022. In line with the CBN’s guidance, N461.50 against the dollar is the exchange rate we used in converting the naira balances to US dollars.
“Based on the analysis above, the CBN’s foreign currency liquidity position is exceptionally lower than the gross FX reserves as of the end of 2022. Using the gross FX reserve ($ 33.88 billion) as of 10 August and holding the FCD constant, we estimate that the CBN’s liquid reserves are currently at $11.87 billion (or 35.0per cent of gross foreign exchange reserves as of 10 August),” the report by Cordros research explained.
According to analysts at Cordros research, the low international liquidity position clarifies why the CBN’s FX supply to the official windows has been underwhelming in the past three years even when the gross FX reserves settled as high as $41.57 billion in September 2021.”
“The significant implication of the low CBN’s international FX liquidity position is that the apex bank’s FX intervention to support the domestic currency will remain underwhelming until there is a significant FX inflow to the CBN and the economy. The preceding will also likely erode foreign investors’ confidence in the economy. Aside from the aforementioned, given that (1) foreign investors have chosen to remain on the sidelines amid the current prohibitively low domestic interest rates and (2) export earnings remain low, we expect the naira to remain on the backfoot and depreciate further against the US dollar in the near term.
“The expected lingering exchange rate pressure also implies that domestic inflationary pressures will be sustained over the rest of the year, more so that PMS prices are expected to remain high.
“Given the CBN’s low international foreign currency liquidity position, foreign investors may demand higher yields on Nigeria’s sovereign instruments, making the country’s external borrowing costs remain prohibitively high.
“Aside from the lack of will to approach the IMF for funding assistance, Nigeria’s unwillingness to embark on currency and fiscal reforms has been at the core of the reasons the country has been unwilling to meet the IMF for funding support. Thus, given that the government is rapidly churning out reforms after embarking on FX and PMS subsidy reforms, we believe this is the perfect opportunity for the country to approach the IMF for funding support.
“In this instance, the government will not need to do much as the majority of what the IMF will demand, as conditions are what the country is already embarking upon. In our view, removing gasoline subsidies and floating the currency without plans to boost the FX supply in the short term will take the country back to where it was before the reforms. Indeed, recent developments in the FX space suggest the CBN is managing closing rates at the official FX market, given that the exchange rate, in recent times, has been trading within the N740.00 – N780.00/USD band despite the meagre FX supply relative to demand.
“Over the medium term, diversifying the economy’s export base is paramount to solving the reoccurring exchange rate issues. Nigeria needs to look beyond crude oil and earn more from stable exports – it is non-negotiable,” the report added.
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