Report: Nigeria’s FX Import Cover Now 5.2 Months, Higher Than Ghana, S’Africa, Others

Dike Onwuamaeze

A report by the Vetiva Research has shown that Nigeria’s foreign reserves could provide 5.2 months import cover, which placed the country in more comfortable position than Ghana, Kenya, South Africa and Angola that have 2.5, 4.0, 4.9 and 4.4 months import covers respectively.

The report, which was obtained by THISDAY yesterday, stated that: “Beginning with the import cover indicator, all our coverage economies have reserves above the rule of thumb (3 months) except Ghana.

“After adjusting Nigeria’s reserves for short-term foreign currency drains, import cover fell from about 7.9 months to 5.2 months. Unsurprisingly, Ghana’s import cover falls short of the required levels, following the capital flight of 2022.”

The report also assessed the capacity of the countries to withstand capital flight from the currency by residents, which showed, “that Angola is the most equipped to handle a scenario where domestic residents initiate capital flight, while South Africa emerges as the least prepared in this regard.”

It also assessed the capacity of reserves to cover short-term external debt and observed that Nigeria is in a better position than the other countries.

It said: “Nigeria and South Africa excel in this assessment, even though there have been net reserve adjustments in the case of Nigeria.

“Notably, Nigeria has successfully repaid its $500 million Eurobond and does not face any external debt maturities in 2024.

“Furthermore, Nigeria’s reserves are fully sufficient to cover its current account, which is in a surplus position. Consequently, the debt-reserve metric for Nigeria is deemed adequate. South Africa equally has enough reserves to cover its short-term external debt.”

The report added that Nigeria’s net reserve stock was at most c.$22 billion in 2022.

The Vetiva Research noted that upon the publication of the audited financial statements of the Central Bank of Nigeria (CBN), “we undertook the computation of Net International Reserves (2022) following the specific guidelines outlined in the IMF’s Assessment of Reserve Adequacy (ARA) Guidance Note Definition. This process essentially entails subtracting short-term foreign currency liabilities and off-balance sheet items from the total gross reserve position.

“Utilising the conversion rate of N461.50/$ (as stated in the financials), we arrived at a Net International Reserve Position of approximately $22.2 billion.”

It also applied the accrual principle of accounting and the IMF guidelines, and made deductions pertaining to portions of security lending agreements with JP Morgan and Goldman Sachs.

The Vetiva Research stated: “The recorded value of the entire security lending arrangement stood at $15 billion. However, only 37 per cent of this amount is slated for payment within the upcoming year, equating to $5.5 billion.

“We extended the same methodology to foreign currency forwards. Moreover, we excluded foreign currency deposits belonging to non-governmental customers from our calculations, in line with the ARA guidelines.

“A noteworthy concern arises in relation to the undisclosed breakdown and maturity profile of OTC future contracts and swaps outlined in the financial statements. While OTC future contracts are naira-settled, the maturity profile of swap arrangements is needed to make the necessary deductions.

“Transitioning further, our assessment concludes that Nigeria’s net external reserves amount to at most $22.2 billion. This net reserve stock translates to an import cover period of 5.2 months, surpassing the minimum requirement of 3.0 months.”

The report also commented on the Nigerian National Petroleum Company Limited’s secured a $3 billion Emergency Crude Repayment Loan from the African Export-Import (AFREXIM) bank that was meant to shore up the Naira, and concluded that “from a fiscal standpoint, the prepayment of taxes and royalties to the Nigerian government is a cheaper cost of financing the budget.”

It, however, noted that, “caution has to be applied as monetary policy remains the adequate measure of short-term interventions in the foreign exchange market.” 

The report further warned that this might not appear feasible over the short to medium term, without a meteoric rise in crude production.

It added that, “this may not be feasible without proper sterilisation by the monetary authorities through Open Market Operations or Nigerian Treasury Bills. Thus, we believe these funds could raise money supply further, deteriorate Nigeria’s broad money-to-reserve ratio, and create room for further demand pressure in the foreign exchange market.”

It also pointed out that the reintroduction of BDCs could do little to change the Naira’s fortunes in the FX market. 

It stated: “While we acknowledge these measures, we believe the underlying low FX supply could keep the FX gap elevated. Thus, measures to boost crude supplies and organically grow the external reserve stock are required.

“Going into the ember months, we retain our bearish outlook on the Naira till oil production recovers significantly. However, increased interventions (though unsustainable) could reduce the pace of depreciation at the parallel market.”