Nigeria's External Reserves Enough to Defend Naira –Analysts
Yemi Cardoso, CBN Gov

Nigeria’s External Reserves Enough to Defend Naira –Analysts

Despite hanging obligations, Nigeria’s foreign reserve position is enough to defend the naira, the country’s local currency. Analysts take the position in review as the exchange rate continues to worsen.

The naira appreciated to N789 at the official window at the weekend while the parallel market rate was pinned at N1,300 to a US dollar. Based on the Central Bank report, most of the FX obligations are maturing in the future. Eurobond repayment and FX swap arrangements are not expected to mature in the short term, giving the apex bank a healthy buffer to intervene in the market.

Last week, external reserves gained further traction amidst strained foreign currency inflows into the economy. According to data from the Central Bank of Nigeria (CBN), foreign exchange reserves surged to $33.326 billion, reversing its persistent weekly decline on record.

Despite the recent decline, Nigeria’s foreign exchange reserves are still in a relatively robust position, equivalent to covering approximately 4.4 months of current external payments, Cowry Asset Limited to investors in an update.

Before the devaluation of the naira in June, the apex bank market intervention had plunged amidst increasing oil for loan swaps.  Over the years, Nigeria’s swap arrangements impacted the amount that flows into the gross reserves.

Weak external position kept the economy starved for US dollar inflows, and this worsened due to unattractive returns on investment windows that could attract foreign portfolios.

In the foreign exchange market, FX spot rates diverge over an untamed appetite for imports in the country. While some corporates require raw material imports, some invisible payments have been for final consumptions.

Last week, the naira appreciated by 2.3% to N789.94 per United States (US) dollar at the official window for investors and exporters of allowable goods and services.

This happened due to moderation in forex demand following a decline in the volume of US dollars transacted at the Nigerian Autonomous Foreign Exchange Market (NAFEM).

Though foreign currency scarcity challenges persist, Nigeria’s gross external reserve jumped further, according to data obtained from the central bank website. For the third week straight, there has been an inflow into the nation’s external reserves, a development supported by increased oil volume production.

The organisation of PTREOLUEM Exporting Countries (OPEC) said in its monthly report that Nigeria’s production hit 1.4 million barrels per day. Though it was a steep improvement, production volume has continued to stay behind about 1.8 million barrels per day quota from the oil group.

Detail showed that Nigeria’s FX reserve recorded another accretion as the gross reserve level appreciated by USD51.97 million in the just concluded week to USD33.31 billion.

Meanwhile, the naira appreciated by 2.3% to NGN789.94/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM), with total turnover at the market decreasing by 16.0% to USD361.09 million on Thursday, according to Cordros Capital.

Analysts noted that trades were consummated within the N644.00 – N981.00 band, though data from Refinitiv showed that the local currency depreciated to N980.

In the Forwards market, the naira rate depreciated across the 1-month contract fell by 3.4% to N834.18, and 3-month declined by 3.1% to N850.71. Also, forward contracts for 6 months lost 2.7% to N876.57 per greenback while contracts for 1 year weakened by 1.5% to NGN933.51.

Given the CBN’s unbanning of importers of all the 43 items previously restricted from the NAFEM in 2015, the market realised that FX supply is still minimal. Hence, analysts at Cowry Asset said they observed that the official market was faster than what the market anticipated. Nigeria’s importers have returned to the parallel market to fulfil their FX obligations.

In addition, analysts said the incentives for holding the naira continue to be limited by the day, coupled with the panic-buying arising from the expectations of further currency pressures amidst limited FX supplies.

Consequently, barring any significant FX inflows or convincing action by the policymakers to turn the tide, we expect the exchange rate pressures to linger in the short term, Cowry Asset managers told investors in an update

Nigeria’s gross external reserve position can cover about 8 months of merchandise import on the basis of the balance of payments for the 12 months to Dec 2022. Import coverage will be limited to almost 7 months when services are added, analysts said.

FMDQ’s data shows that monthly transactions on the investors’ and exporters’ (I&E) fx window for 9M 2023 are currently running at an average of $2.1 billion, compared with $2.4 billion over the comparable period of 2022.

Nigeria’s foreign exchange reserves, while not at the peak, have indeed sparked concerns regarding the nation’s capacity to fulfil import requirements and meet its debt obligations.

It’s worth noting that despite the recent decline, Nigeria’s foreign exchange reserves are still in a relatively robust position, equivalent to covering approximately 4.4 months of current external payments.

Cowry Research thinks this underscores the need for prudent management of these reserves to ensure the country’s economic stability and its ability to meet liquidity demand and defend the Naira. Naira Devaluation Deepens Economic Crisis in Nigeria

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