Nigeria’s gross external reserves are seen heading towards the $40 billion mark, the level they last touched in February 2014, before the most recent slide in crude oil prices. This follows positive signs in the macroeconomic space, including the pick-up in oil prices, as well as the country’s rising production.
“Given the resurgent portfolio investor interest in the Nigerian market, strong demand for fixed income, external issuance plans of the Federal Government, with talk of a number of Eurobonds, the recovery in oil prices and output, against a backdrop of still-muted domestic demand, a recovery in Nigerian FX reserves to about USD 40 billion is easily plausible”, said Razia Khan, managing director, Chief Economist, Africa Global Research, Standard Chartered Bank.
The gross official reserves increased by US$670 million in September to US$32.5 billion. Since the recent low at end-October, there has been an accumulation of US$8.5 billion. The more telling figure, according to an FBNQuest report, is the increase of US$2.2 billion since end-March, when the Central Bank of Nigeria (CBN) stepped up its foreign exchange interventions, under its multiple currency practices (MCP).
CBN governor, Godwin Emefiele disclosed at the last Monetary Policy Committee (MPC) meeting, that the external reserves position grew to US$32.9 billion at close of business on September 25, 2017.
“When we allow for the sharp fall in imports in the recession, the buffer is now comfortable. By way of caution, we should stress that the figures provided by the CBN are gross and mask the swap transactions it has entered into with local banks”, analysts at FBNQuest said.
The pick-up in oil production has been an obvious positive for accumulation. Officials are encouraging the view that it is back at, or close to the 2.0 mbpd level. Further, the FGN plans to raise US$2.5 billion by November, from additional Eurobond sales, for which the market has a healthy appetite.
“If the price of oil remains stable in the 50s, then we are likely to hit $40bn sooner, rather than later “, Taiwo Oyedele, head of tax and regulatory services, PWC, said in his response to BusinessDay.
According to Oyedele, a high reserve balance will help improve Nigeria’s sovereign credit rating and consequently reduce cost of borrowing cost for government and private sector.
The CBN will also be boosted by the positive signals from the investors’ and exporters’ window (I&E) or the Nigerian Autonomous Foreign Exchange Fixing (NAFEX). The I&E turnover from its launch in late April, through to October 04, 2017 totals US$14.5 billion, the report indicated.
The latest boost has been provided by the return of the offshore investor to local debt markets. “We understand that the CBN’s forex supply to NAFEX is now negligible and we know that it has reduced its supply to other windows, such as that for the retail segment for invisibles. “These various positive developments tell us that gross reserves are heading towards the US$40bn mark, which level they last touched in February 2014 (before the most recent slide in the crude oil price)”, FBNQuest, analysts said.
However, Khan noted that the challenge for Nigeria will be to develop a workable foreign exchange system that safeguards macroeconomic stability, even when times are less favourable.
Given this cushion of reserves, analysts at FBNQuest do not see a major change to the CBN’s MCP either this year or next. “The current arrangement suits the authorities, and they are no real pressures to change tack”, the analysts said.
Uche Uwaleke, Associate Professor and Head, Banking and Finance department Nasarawa State University, said gross external reserves of about $40 billion is enough to finance over eight months of imports. It puts the CBN in a stronger position to manage the foreign exchange market, leading to a strong naira, lower exchange rate and a positive pass through effect on inflationary pressure. It will likewise enhance the international credit standing of the country.
Uwaleke however, said major risks include the gradual reduction in the break-even cost of Shale oil production in the US, the likely resurgence of pipeline vandalism and oil production disruptions in the Niger Delta region, as well as the a heightened political temperature choking off prospects of effective implementation of the ERGP.
In his emailed response, Tope Fasua, CEO, Global Analytics Consulting limited, said “I believe this can happen. However, it could be achieved faster with better fiscal responsibility. Stories of corruption are still quite rife. I believe Nigeria could accrete another $10billion to its reserves by the middle of 2018 if crude oil prices hold up, and if taxpayers’ money is better utilised. Conflicts and threats around the world may ensure that prices stay up. However, it is not advisable for Nigeria to keep relying solely on crude oil”.
HOPE MOSES-ASHIKE
