Pressure Mounts as CBN Indicates External Reserves May Fall to $30bn
Godwin Emefiele , CBN Governor

Pressure Mounts as CBN Indicates External Reserves May Fall to $30bn

Foreign Exchange rates convergence seeks by the Central Bank of Nigeria is under threat as the apex bank projected a decline in external reserves in 2020.  

In its recently release monetary credit, foreign trade and exchange guideline, the apex bank hinted that external reserves may fall to $29.9 billion be December, 2020.

The nation’s external reserves printed at $35.748 billion on October 2, 2020 according to the Central Bank of Nigeria’s website.

Naira has remained under pressure from multiple fronts due to lower accretion into the external reserves.

Pressure Mounts as CBN Indicates External Reserves May Fall to $30bn
Godwin Emefiele , CBN Governor

This was further worsen as foreign investors shy away from participating in the economy due to weak sentiment, capital control.

Inability to repatriate funds has kept foreign investors in the Nigerian fixed income market despite lower yields on instrument.

Some foreign investors however divert their funds to equities market, with Heineken raising position in Nigerian Breweries, while Nestlé Nigeria received further investment in stocks in similar manner.

Analysts explained that the development may not be unconnected with backlogs of unfulfilled FX demand by the foreigners.

In a note, CSL Stockbrokers hinted that based on excerpts from the CBN’s recently published monetary credit, foreign trade and exchange guidelines for fiscal years 2020-2021, the CBN has expressed concerns on outlook for the country’s external reserve and exchange rate.

According to the report, CBN cited worsening current account balance, decline in oil price, and risk aversion on the part of investors which would affect capital inflows risks as significant concerns for accumulation in external reserves.

The apex bank concluded that these factors combined with speculative activities at the I&E window and BDCs would exert pressure on the exchange rate.

Given the aforementioned, CBN estimates that the external reserves would be pressured lower to between US$29.9 billion and US$34.3 billion by the end of December 2020.

CSL Stockbroker Limited stated that exchange rate and external reserves have been pressured in 2020 due to decline in oil receipts and mounting capital reversals among foreign portfolio investments.

The firm said in a note that the CBN has been reluctant to intervene actively in the different segments of the markets following the significant dip in April.

Nevertheless, USD loans from IMF at US$3.4 billion in April 2020 amidst limited interventions in the FX market has supported accretion in the external reserves in recent months.

However, CSL said the limited intervention in the various segments of the FX market has led to a backlog of FX demand estimated at US$7 billion.

“We expect the country to continue running a trade deficit for the rest of the year as oil receipts which accounts for over 70% of export earnings remain weak”, CSL Stockbrokers remarked.

The firm said with huge OMO maturities expected till year end, it expects demand from foreign portfolio investors who want to repatriate their funds to exert further pressure.

“That said, we expect the wide premium between the parallel market and I & E window to remain even if the CBN decides to supply the needed FX to clear the backlog of demand”, CSL Stockbrokers held.

Read Also: Naira Trades Strong despite Marginal Decline in Oil Prices

Pressure Mounts as CBN Indicates External Reserves May Fall to $30bn