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A map of Nigeria

 
 

  • Falls 1.7% to $34.3bn, lowest in 12mths

  • Shows dim outlook in spite Eurobond prospect

By Babajide Komolafe

 
Nigeria’s external reserves fell by 1.7 per cent, month-on-month (MoM) to $34.27 billion in May, the lowest level since May last year.
This follows a six weeks decline from April 16th, driven by increased dollar sales by the Central Bank of Nigeria (CBN) in its bid to clear its dollar demand backlog accruable to foreign portfolio investors, FPIs, estimated at $2 billion.
Speaking to the figures at the backdrop of the last week’s meeting of the Central Bank of Nigeria, CBN, Monetary Policy Committee (MPC), CBN Governor, Mr. Godwin Emefiele, said: “The Committee noted the external reserves declined to $34.17 billion as at May 21, 2021, from $34.29 billion as at end-April 2021. This reflects sales to the foreign exchange market and third-party payments.”
 

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Data from the CBN showed that the reserves fell by  $980 million during the six weeks,  from $35.25 billion on April 16th to $34.27 billion on May 26th.
Thus while the reserves recorded a marginal increase of 0.2 per cent, MoM, in April, it declined in May by  1.7 per cent MoM to $34.27 billion.
Further analysis by Vanguard Public Finance showed that the reserves maintained a fluctuation over the months of this year, rising in January by $929 million or  2.6 per cent, MoM, to  $36.3 billion from $35.37  billion in December, courtesy of rising crude oil prices and base effect.
The reserves, however, fell in February by $1.2 billion or 3.3 per cent, MoM, to $35.09 billion following increased dollar sales by the CBN. This trend persisted in March as the reserves fell again by $279 million or 0.7 per cent to $34.82 billion.
The marginal decline in March followed a two week  upward trend in reserves, which commenced on March 18th from $34.42 billion to $34.82 billion at end of the month, resulting in $37 million accretion to the reserves.
 
Outlook
 
Prospects for further accretion to the external reserves emerged last month, when the Director General of the Debt Management Office (DMO), Patience Oniha, said that the Federal Government has commenced plans for a Eurobond issuance with an open bid to select advisers. She said that the amount to be raised would be within the foreign borrowing plans for 2021.
This follows Senate approval in April of another $2.6 billion external loan request from  President Muhammadu Buhari. The approved loan request comprises €995 million going to finance priority projects of the federal government and $1.5 billion  for  the thirty-six state governments to finance critical projects.
 
Out of the total sum approved, $1.5 billion is to be sourced from the World Bank; €671 million euros from the Export-Import Bank of Brazil; and another €324 million euros from the Deutsche Bank of Germany.
The tenor/moratorium of the loan to be sought from the World Bank is 25 years at an interest rate of 2.45 percent per annum; while that from the Export-Import Bank of Brazil is for 15 years at an interest rate of 2.935 percent; and the loan request from the Deutsche Bank of Germany for seven (7) years at 2.87 percent interest rate.
However, the approval for $1.5 billion expected from the World Bank, is subject to foreign exchange reforms by the CBN, especially unification of the exchange rates.
 
Analysts’ views
 
While these moves for new foreign loans and hence additional forex injection are expected to boost external reserves, analysts, however, cited the backlog of forex demand by FPIs as a major determining factor for stability in the reserves.
Analysts at Financial Derivatives Company, FDC, Limited noted that the decline in reserves may persist as the CBN intensifies its effort in clearing its forex demand backlog notwithstanding the fresh supply from the additional loans.
“We expect the external reserves to fall below $34.7 billion in the near term as CBN intensifies its effort in clearing its forex demand backlog”, they said.
Analysts at Vetiva Capital Management Limited also cited the clearing of the forex backlog as a factor in attracting dollar inflow from FPIs.
They said: “Given the decision of fiscal managers to adopt the NAFEX rate in official transactions, this could result in a price discovery process and reduce the official-parallel market gap, especially as the CBN quotes the closing NAFEX rate on its website in lieu of the de-facto peg of ₦379/$.
‘‘To further narrow the gap between the NAFEX and parallel market rates, the CBN had made efforts to boost remittances via the introduction and indefinite extension of the Naira-4-Dollar Scheme, which has reduced volatility in the parallel market. Consequently, the apex bank’s decisions on FX management would remain a headline to watch out for, especially as the Bank mulls over the framework of a Central Bank Digital Currency (CBDC).”
While noting that the proposed Eurobond issuance will help the country move towards exchange rate correction,  Managing Director of FDC Limited, Mr. Bismarck Rewane,  projected that the reserves could still  decline by $2 billion to $3 billion.
“ Our view is that a $4billion to $5bn disbursement to the market by the CBN will reduce external reserves by $2 billion to $3 billion”.
He however added that this will allow the parallel market to converge towards N470/$, reduce naira liquidity in the system and push interest rates up at the interbank market by 300 to 400 basis points while also increasing  supply of goods and parallel market discount will help moderate inflation.
 

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