February 22, 2022

Pressure on external sector may depress reserves further in 2022 — Analysts

By Nkiruka Nnorom

Financial analysts have indicated that Nigeria’s Foreign Exchange (FX) reserve may deplete to US$35 billion at the end of the year 2022 given limited inflow.

They argued that there is no likelihood of ramping up accretion to the reserves at the pre-pandemic level.

The Central Bank of Nigeria, CBN, had projected that the reserves may surpass US$42 billion by mid-2022 based sustained increase in crude oil price, the impact of eurobond issuance, and the stable exchange rate condition.

Recall that in 2021, the FX reserves had declined by US$66 million to US$40.53 billion in December 2021, from US$41.19 billion in November 30, 2021, representing 1.6 percent decline. The figure has declined to $39.8 billion as at last week.

Speaking on this, analysts at CSL Stockbrokers, an arm of FCMB Bank Group, in a report, said: “CBN is unlikely to ramp up intervention to pre-pandemic levels in the near term as inflows remain tepid. We project the FX reserves to deplete to US$35.00 billion by the end of 2022, translating to goods and services import cover of 5.4 months.

“With that reserve level, we expect the CBN to maintain its current monthly intervention in the FX market of US$1.9 billion, which is 1.6 times lower than the average for Q1-2021 (pre-pandemic level).

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“Meanwhile, the parallel market premium of 32.53% continues to fuel arbitrage opportunities while FX rationing at the Investors & Exporters (IE) window has magnified the demand pressure at the parallel market.

“Our prognosis is for the premium to remain widened, as the CBN is yet to resume FX sale to the BDCs. Beyond this, corporates and individuals who import items restricted by the CBN will continue to source FX from the black market.”

Also, analysts at CardinalStone Finance said: “While foreign reserve has accrued in recent months, capital inflows into the country remain weak due to slow FX reforms and uncertainties surrounding dividend and profit repatriation. In our view, the issue of dollar demand backlogs would need to be addressed, and the overall FX liquidity framework improved to enhance investors’ confidence.”

However, analysts at Investment One, a Lagos based investment firm, said that the possibility of eurobond issuance this year and the commencement of operations at the Dangote Refinery would reduce the pressure on the naira and improve the FX reserves.

They said: “Although FX reserves at current levels may support the CBN’s ability to defend the Naira in the near term as it continues to clear FX backlogs; pressure on crude oil prices in the global market, due to concerns about the emergence of Omicron and other variant of the virus on demand outlook, may cast a doubt on the sustainability of the Apex bank’s ability to continue to defend the Naira. “Furthermore, the country’s inability to meet up with its oil production quota of 1.86mbpd will continue to lower oil export earnings and reserves accretion.”

Vanguard News Nigeria