Large FX Obligations Threaten Nigeria’s External Reserves
Rising foreign currency (FX) obligations posed a big threat to Nigeria’s external reserves amidst lawmakers’ request that the apex bank should settle Airline operators blocked funds while Eurobond maturity payment is scheduled for July 2023.
Nigeria, one of the crude oil producing nations in Africa, has $35 billion in external reserves covering less than 10 months of imports.
Despite oil trading above the budget benchmark, accretion into foreign reserves has been unimpressive. Analysts said a large size of oil production has been paid for ahead and it doesn’t necessarily mean recent supply will boost reserves.
Nigeria’s foreign reserves will be hit hard by large foreign currency payment, of which 12 Jul 2023 Eurobond repayment is rather an important outflow that its deferment constitute a default.
The economy will record an FX outflow as Federal Government will be under an obligation to settle a $500 million maturing Eurobond raised in the international debt capital market even amidst a rising FX backlog.
The Central Bank of Nigeria initiated capital control to stem an easy flight to safety, restricting forex outflow at the time of US Dollar scarcity to managing the country’s currency risk.
The decision has continued to impact how foreign Investors perceived the local economy. Foreign investors have maintained distance while a number of exits have been recorded in the equities market.
Foreign direct investment is declining strongly due to weak local infrastructure that gives market players a comparative advantage.
Despite double digits inflation rate, the real return on investment portfolio trended negatively, keeping off foreign interest as Nigeria’s naira maintain a downward trend.
Airline Funds Trapped
Last week, lawmakers urged the Central Bank of Nigeria to release $717,478,606 in airlines funds trapped in the country. A number of foreign airlines have been planning to stop operating in Nigeria due to an inability to upstream the U.S. dollar.
A rather too-tough CBN FX management restricts access to forex repatriation for some foreign companies in Nigeria. The development has made Africa’s largest economy an unattractive destination for investment flows.
In addition, lawmakers also asked the apex bank to allocate $25 million to operators at its FX dollar auction. The red chamber further appealed to the airlines operating in the country not to withdraw their services while efforts are on to resolve the issue.
These resolutions followed a motion by Senator Biodun Olujimi during plenary on Wednesday. The motion was presented by the Vice Chairman of the Senate Committee on Aviation, Senator Ibn Bala Na’Allah.
In his lead debate, Na’Allah noted that since January 2021, Nigeria has been the most challenging country for airlines to repatriate their funds to support their operation.
He said, “In February 2023, Nigeria alone accounted for 44 per cent of total airlines blocked funds in the entire world.
“The total airlines’ blocked funds in Nigeria as of March 28th, 2023 amounted to $717,478,606, comprising matured bids that the Central Bank of Nigeria (CBN) is yet to deliver, bids yet to mature and cash balances in airlines’ accounts for repatriation.
Following the pandemic-induced pressure, the CBN became more aggressive with capital control measures. Since then, the apex bank is yet to loosen up.
Over two to three years, foreign investors’ confidence has declined sharply, evidenced by the reduction in the annual capital importation size from $23.9 billion in 2019 to $5.3 billion in 2022, according to Afrinvest.
Analysts noted that the attendant effect of this FX illiquidity has been the sharp erosion of the Naira value by more than 60.0% over the last seven years. These headwinds remain in play despite the steps taken by the CBN to tackle the soaring inflation, analysts said. #Large FX Obligations Threaten Nigeria’s External Reserves
