About 12 months after Newslodge reported that Nigeria’s external reserve was well below the balance of gross reserves reported by the Central Bank of Nigeria (CBN), the global financial services firm JP Morgan on Monday put the nation’s reserve estimate at $3.7 billion.
“Net foreign exchange reserves are significantly lower than previously estimated,” the firm said in its Africa Emerging Markets Research on August 17. “Based on partial information from audited financial accounts, we estimate that CBN’s net foreign exchange reserves were around US$3.7bn at the end of last year, compared to US$14bn at the end of 2021,” he added.
In arriving at the estimate, JP Mogan said he made some assumptions that, if incorrect, would change the picture substantially. The firm said the assumptions include adding $5.0 billion in IMF special drawing rights (SDRs) to external reserves to reach total gross foreign exchange reserves of $37.8 billion, in line with the moving average. 30-day price of $37.08 billion previously released. on the central bank website; adjusting gross foreign reserves with three key currency liability lines that include currency forward contracts ($6.84 billion), securities lending ($5.5 billion) and currency swaps ($21.3 billion); and estimating currency swaps by copying balances of currency futures and OTC futures from a general aggregate published in the financial accounts.
JP Morgan said low net foreign exchange reserves imply continued pressures on the foreign exchange market, but the CBN still has the ability to raise foreign exchange at commercial and semi-commercial rates.
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“Given the highly profitable nature of currency swap deals between the CBN and domestic commercial banks, we expect them to continue for some time, albeit at smaller sizes and possibly more punitive rates,” he said.
“In addition, the authorities are in the initial stages of identifying assets for sale, which may provide some relief in the medium term. For example, the president’s policy advisory council has recommended that the government sell its stake in most joint venture oil and gas assets, a proposal estimated to generate up to US$17 billion. In addition, the recently announced US$3bn loan to NNPC could help in part to improve foreign exchange liquidity conditions in the market.
“We expect NNPC to sell the dollars to CBN and remit the naira proceeds to the government as advance payments of oil revenues and taxes. That said, the large external financing needs of the private sector will sustain the exchange rate pressure”.
Riddle
Last August, Newslodge reported how the nation faced the risk of an empty treasury and rapidly dwindling reserves ahead of the February 2023 general election.
This newspaper also reported that government officials and business leaders with knowledge of the situation confirmed that an elected official brought to the attention of suspended Central Bank of Nigeria Governor Godwin Emefiele the fact that Nigeria’s foreign reserves stood at just $15. billion, well below the $36 billion balance of gross foreign reserves claimed by the bank.
Financial analysts told this newspaper at the time that this would not have mattered much were it not for difficulties in different sectors of the economy, especially export restrictions that had prevented the nation’s oil monopoly from increasing reserves. NNPC’s inability to forward oil sales receipts to the CBNdespite high oil prices, it was also seen as one of the reasons why the naira plummeted in the parallel market.
Earlier this month, CBN’s financials for 2022 raised concerns among analysts and investors as details showed that JP Morgan and Goldman Sachs stock lending could send Nigeria’s credit rating into a free fall amid of efforts to reposition the economy.
The central bank, in its recently released 2022 financial reports, reported that it borrowed $7.5 billion from US banks. JP Morgan and Goldman Sachs “In exchange for their securities being held as collateral,” a move that analysts dismissed may hurt the nation’s fragile fiscal position and credit rating.
Silver lining
In its research report, JP Morgan said the apparent stalling in reform momentum and lower-than-expected net foreign reserves make markets nervous, but it remains “cautiously optimistic.”
He said the nation’s headline inflation may rise while the CBN is expected to implement tightening tools to address the pressure.
“We now see headline inflation rising towards 28% by the end of the year. While we expect the inflation momentum to start easing from Q4, headline inflation will remain elevated, particularly due to higher food costs.
“The president’s decision to maintain a cap on gasoline prices is likely to provide some relief, but the exchange rate is likely to remain on a depreciating path and put further pressure on prices, with a larger base impact. wide. The CBN has had to tighten monetary conditions by raising the monetary policy rate (MPR) by a token 25bp last month, while narrowing the corridor around the MPR.
“Furthermore, the CBN conducted its first open market operation (OMO) this year while charging a cash reserve ratio (CRR) to banks that miss its target 65% lending-to-deposit ratio. Going forward, we believe the CBN could focus on using other tightening tools, rather than raising rates through the MPR. Therefore, we maintain our call for an unchanged MPR of 18.75% for the rest of the year.”
The financial services firm said Nigerian sovereign bond prices have fallen between 2.5 and 5 points on the curve since the central bank released its audited financial accounts late last week.
“In addition, the decision to freeze gasoline prices at current levels raised concerns that fuel subsidies may have been reinstated, further weighing on asset prices,” it added.
“That said, a cabinet announcement that appointed technocrats to key posts such as the Finance Ministry may stem the fall in Eurobond prices in the near term, even if a likely slower pace of reform implementation could constrain the rise in bonds from here. The foreign exchange market will remain in focus given the likely lower starting point for net foreign exchange reserves, with an overall balance of payments deficit pointing to continued currency pressure.”
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