With Foreign Reserves Rising 86% in 17 Months, Analysts Credit CBN’s FX Policy, Oil Prices

Kunle Aderinokun and Bamidele Famoofo

In 17 months, Nigeria’s foreign reserves have recorded $19.8billion increase from $23billion in October 2016 to $42.8billion on February 13, 2018, representing some 86 per cent growth.

The Central Bank of Nigeria (CBN) had announced on January 5, 2018 that the nation’s external reserves recorded its highest growth in four years at $40.4billion, but the figure on February 13, 2018, has exceeded that by 5.94 per cent.

Foreign exchange reserves (also called forex reserves or FX reserves) are monies or other assets held by a central bank or other monetary authority so that it can pay, if need be, its liabilities.

The quantum leap in Nigeria’s foreign reserves portfolio has remained a subject of discourse among multilateral organisations like the World Bank and local institutions. While the former have linked the growth to a favourable commodity price in the world market, the Central Bank of Nigeria and some analysts maintain that the policies on foreign exchange management have been a major boost to the growth in external reserves.

The World Bank disclosed in its January 2018 Global Economic Prospect report launched in February in Washington DC, that an upward revision to Nigeria’s growth forecast is based on expectation that oil production will continue to recover and that reforms will lift non-oil sector growth.

A report from the Organisation of Petroleum Exporting Countries (OPEC), corroborated the position of the World Bank that Nigeria’s economy growth, which also has impacted its external reserves, is in no way disconnected with an increase in crude oil prices which is particularly favourable to Nigeria.

“Apart from Bonny Light crudes, other Nigeria’s oil grades such as Brass River and Qua Iboe also appreciated in value to sell at $65.32 and $61.22 per barrel respectively on Tuesday, January 2, 2018, at the international market”. The OPEC basket however declined to $60.62 a barrel on Wednesday, February 14, 2018 from $61.22 per barrel recorded as at January 2, 2018.

Nigeria’s Central Bank Governor, Godwin Emefiele, had in November last year at a gathering of bankers, economists and key stakeholders in the economy in Lagos predicted that the nation’s foreign reserves which has witnessed a positive growth over the last 12 months, from just over $23 billion in October 2016 to over $33 billion in October 2017, will hit the $40billion mark in 2018. He said the feat was achieved largely due to the policy direction of the bank on foreign exchange.

His words: “The accretion in reserves does not only reflect increased inflow but also our shrewd forex demand management strategy. When we introduced a policy restricting 41 items from our forex markets, we were called all manner of names.”

Apart from its restriction policy on import, Emefiele disclosed in December last year that the nation’s foreign reserves rose to $38.2billion with the issuance of Eurobonds by the Federal Government. He said the external reserves figure was the highest in 39 months.

In November, the federal government raised $3billion through Eurobonds, which was oversubscribed by about $11billion and split across 10-year and 30-year tranches at issuance yield of 6.5 per cent and 7.625 per cent, respectively.

Some financial experts could not agree less with Nigeria’s number one banker as they said the positive growth witnessed in the economy in recent times could be traced to the forex management policy of the CBN and rising oil prices.

They identified the source of resurging forex liquidity and stability in the sectors as the emergence of the popular Investors’ & Exporters’ (I&E) FX Window, which has been operational for about 11 months and stable oil prices.

Specifically, financial experts at Afrinvest Securities Limited, in one of its weekly market update in February said  the improved liquidity in the FX market remained a key determinant of the performance of the broader economy, as recent developments in manufacturing and non-manufacturing sectors has indicated.

They, however noted that despite improvements recorded in 2017, gains still remained “fragile” as the impact was yet to be reflected in  the non-oil sector growth figures, which was unimpressive in third quarter data as provided by the Purchasing Managers Index (PMI) for December, released by the CBN.

Under the renewed forex intervention and management policy of the Central Bank of Nigeria since February 2017, these sectors were given opportunities to obtain the much-needed forex liquidity to sustain activities amid dwindling forex earnings by the country.

Mr. Isaac Okoroafor, Acting Director, Corporate Communications, CBN, reiaterated that restricting access to official market against importers of the 41 items was the major turning point that helped to stop the haemorrhaging of the country’s external reserves, which hitherto witnessed heavy depletion due to huge import bills and other debt obligations.

According to him, the CBN policy had ensured a decline in Nigeria’s import bills from over $5.0 billion monthly in 2015 to about $1.5 billion in 2017.

He expressed optimism that with the determination of the apex bank and the cooperation of the fiscal authorities, the external reserves would continue to enjoy more accretion in the course of 2018.

Investment Researcher at WSTC Financial Services Limited, said, it was expected that the fiscal authorities will be more inclined to managing the nation’s resources giving lessons learnt from the economic disruptions in the last few years.

Nevertheless, Director, Union Capital Markets Ltd, Egie Akpata, believed the rapid growth in reserves  was largely due to rising oil price and FX inflows by foreign portfolio investors. 

He, however, added that, “Given the recent pullback in the oil price, it is possible that the rate of accretion will slow down. However, the recent $2.5b Eurobond issuance would likely show up as a short term spike reserves in the next week or two.”

Noting that, “Rising reserves gives comfort to foreign portfolio investors that the Naira is likely to hold at these levels in the near term,” Akpata said,  “It also gives the CBN some ammunition to defend the Naira later in the year when election jitters could impact FPI flows.”

Going forward, the director expressed the hope that, “Given the impact of FX scarcity on GDP growth in 2016, I would expect this healthy reserves to keep the FX market liquid and boost GDP growth.”

“A lot however depends on the oil price which is outside the control of CBN. If oil falls much below $60, we might not see reserves grow much except when Nigeria issues new Eurobonds,” he, however, added.

In his own analysis, the CEO, Global Analytics Consulting, Tope Fasua, argued that, “The rise in the price of Crude Oil is responsible for the recent accretion given that the Minister of Finance recently spoke about ‘balancing’ the budget around $45 as price of the commodity.”

Suggesting that, “This accretion needs to be weighed against our increasing dollar exposure in the debt markets as well, as noted by Agusto and Co, among others,” he noted that,  “The tempo can be sustained for as long as crude oil prices keep rising or maintains a relatively high level.”

“But the tempo can be halted if for any reason we experience another dip. This again brings to the fore the dependency problem,” he added.

Be that as it may, Fasua submitted that, “It’s a good development for the economy, but those expecting a strengthening of the Naira will have longer to wait because $42billion is not really a lot of cushion still. Countries like Algeria – also a crude oil exporter – are sitting on as much as $150billion. Our years of waste still haunt us, and we are yet to kick a lot of our bad spending habits.”