External reserves gain $242.55m in 10 days

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Nigeria’s dollar buffers seem to have reversed the downward trend, which they maintained for most part of April and May, as latest data published by the Central Bank of Nigeria (CBN) shows that the country’s external reserves gained $242.55 million between June 6 and June 10, 2022. According to the apex bank, the external reserves rose from $38.42 billion on June 6 to $38.66 billion on June 10, 2022, meaning that the reserves increased by $242.55 million. New Telegraph’s analysis of the CBN’s data indicates that after heading south for most part of April and May, the reserves inched up to $38.483.66 billion on May 31 from $38.483.59 billion on May 30.

They, however, resumed their downward slide, falling to $38.42 billion on June 6, 2022, only to rise to $38.46 billion on June 7. Analysts believe that the reserves accretion of the last few days is the result of the price of oil (the commodity that accounts for over 70 per cent of Nigeria’s forex earnings) remaining above $120 per barrel in the last two months (it was $132.62 per barrel as of June 16 on CBN’s website). However, despite high oil prices, analysts at Financial Derivatives Company (FDC) predicted in May that the external reserves could fall to $38 billion in the near term as further depreciation of naira will make CBN to continue with its intervention in the forex market.

The analysts said: “Forex demand pressure is expected to increase as manufacturers intensify stockpiling ahead of election,” adding that “depreciation of naira will likely continue.” They noted that with Nigeria not fully benefitting from higher oil prices due to sub-optimal production occasioned by operational challenges such as vandalism and oil theft, the country’s external reserves resumed steady depletion towards the end of April, falling to $39.62 billion. Also, in its “Nigeria Staff Report for the 2021 Article IV Consultation” report published in February, the International Monetary Fund (IMF) said Nigeria’s external reserves could fall to $29.1 billion by 2024 on the back of lower oil prices, restricted Eurobond market access and higher capital outflows.

The report said: “Nigeria’s external position is assessed to be weaker than warranted by fundamentals. External buffers are limited, with FX reserves projected to remain below 100 per cent of the IMF’s ARA metric in the medium term. “Given still significant naira asset holdings of FPIs, estimated at $16.9 billion as of September 2021, Nigeria remains vulnerable to capital outflow pressures notwithstanding the authorities’ steady clearing of FX payments backlogs to FPIs.

“Further drains on FX reserves could come from existing FX swap arrangements for which details were not available.” According to IMF, for Nigeria to boost its external position, the country must establish a unified and market-clearing exchange rate. New Telegraph however notes that in a report it released in late March, Fitch Ratings, citing high oil prices, had forecast that Nigeria’s foreign exchange reserves will increase to $43 billion in 2022, up from $40.5 billion at end-2021. The credit rating agency stated: “Nigeria’s gross international reserves have been bolstered by higher oil export receipts, which will continue in 2022.

We forecast reserves to increase to $43 billion in 2022, up from $40.5 billion at end-2021. We estimate that the combination of oil exports and remittance inflows helped to bring the current account (CA) into balance in 2021 after a deficit of 4.2 per cent of GDP in 2020. “ Our baseline assumption is for the CA balance to remain broadly unchanged in 2022, but sustained higher oil prices at their present level of S112 per barrel could widen the 2022 current account surplus to four per cent of GDP, with upside to Nigeria’s international reserves.”

But while predicting that higher oil prices would lead to an improvement in external liquidity and support Nigeria’s near-term economic growth, Fitch noted: “These improvements are balanced against high hydrocarbon dependence, which leaves Nigeria vulnerable to negative oil price shocks and structurally low domestic revenue mobilisation,” adding that the continuation of fuel subsidies would limit upside from higher oil prices on Nigeria’s public finances. Significantly, the agency said at the time that its forecasts were based on its December 2021 oil price assumptions ($70 per barrel in 2022 and $60 per barrel in 2023). Although high oil prices may be having a positive on Nigeria’s external reserves, it was learnt that the reserves accretion reported by CBN in recent days was caused by the apex bank deliberately reducing its intervention in the forex market in its bid to conserve the dollar buffers. New Telegraph reported last month that worsening forex scarcity in the official market had compelled some deposit money banks (DMBs) to start informing their customers, interested in purchasing foreign currency to meet needs such as international school fees, upkeep and rent payments as well as Basic Travel Allowance (BTA) and Personal Travel Allowance (PTA) to submit their applications in advance. For instance, in an email titled: “Important update on FX transaction,” sent to its customers, which was sighted by this newspaper, one of the country’s Tier 1 banks said it will need a 30-day period to fulfil requests for school fees, upkeep and rent payment.

 

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