Foreign Reserves Decline by $4.07bn in 11 Months as CBN Clears FX Backlog

Kayode Tokede

Nigeria’s foreign reserves dropped by $4.07 billion in 11 months of 2023 amid Central Bank of Nigeria (CBN) intervention in the foreign exchange market.

Nigeria’s foreign exchange buffer closed November 30, 2023 at $33 billion; dropping by nearly 11 per cent or $4.07 billion from $37.069 billion it opened this year.

The CBN governor, Mr. Olayemi Cardoso, recently disclosed that it responded to the backlog of foreign exchange forward obligations with payments made to 31 banks.

According to him, “We have been subjecting these payments to detailed verification to ensure only valid transactions are honoured. In a properly functioning market, it is reasonable to expect significant FX liquidity, with daily trade potentially exceeding $1 billion. We envision that, with discipline and focused commitment, foreign exchange reserves can be rebuilt to comparable levels with similar economies.”

The foreign reserves, recorded one of its highest decline in November 2023, dropping by 1.17 per cent or $392.08 million to $33 billion as of November 2023 from $33.396 billion it close October 2023.

In October 2023, the foreign reserves had gained 0.48 per cent or $158.5 million to $33.396 billion as of October 2023.

The downtrend in foreign reserves continued to mount pressure on the naira at the official market closing November 2023 at N942.117 against the dollar from N448.55 against the dollar it opened this year. 

Analysts attributed the depletion of the foreign reserves to CBN clearing backlog in the aviation sector, and among other sectors.  

Sealing, The Vice President, Highcap Securities Limited, Mr. David Adnori noted that continuous intervention, external debt servicing and the lower foreign exchange inflow from oil exports contributed to the dwindling foreign reserves in 11 months of 2023.

He added, “The country has struggled to meet the Organization of the Petroleum Exporting Countries (OPEC) oil production quota in the past few years, robbing the opportunity to benefit from the elevated oil prices, which should shove up the external reserves.”

On their part, analysts at Cordros Research described the International Monetary Fund (IMF), reserve liabilities as all foreign exchange liabilities to residents and non-residents, including commitments to sell foreign exchange arising from derivatives (such as futures, forwards, swaps, and options) and all credit outstanding from the Fund.

“Also, the following are excluded from reserve assets:  any assets that are pledged, collateralized, or otherwise encumbered, claims on residents, claims in foreign exchange arising from derivatives in foreign currencies vis-a-vis domestic currency (such as futures, forwards, swaps, and options), precious metals other than gold, assets in nonconvertible currencies, and illiquid assets.

“Based on the methods above and using data from the CBN’s 2022 financial statement, table 1 represents our findings and estimates of (1) Nigeria’s international foreign exchange  liquidity position and (2) net foreign reserves as of the end of 2022. In line with the CBN’s guidance, N461.50 against the dollar is the exchange rate we used in converting the naira balances to US dollars.

“Based on the analysis above, the CBN’s foreign currency liquidity position is exceptionally lower than the gross FX reserves as of the end of 2022. Using the gross FX reserve ($ 33.88 billion) as of 10 August and holding the FCD constant, we estimate that the CBN’s liquid reserves are currently at $11.87 billion (or 35.0per cent of gross foreign exchange reserves as of 10 August), ”Cordros explained.

They added that the low international liquidity position clarifies why the CBN’s FX supply to the official windows has been underwhelming in the past three years even when the gross FX reserves settled as high as $41.57 billion in September 2021.”

“The significant implication of the low CBN’s international FX liquidity position is that the apex bank’s FX intervention to support the domestic currency will remain underwhelming until there is a significant FX inflow to the CBN and the economy. The preceding will also likely erode foreign investors’ confidence in the economy. Asides from the aforementioned, given that (1) foreign investors have chosen to remain on the sidelines amid the current prohibitively low domestic interest rates and (2) export earnings remain low, we expect the naira to remain on the backfoot and depreciate further against the US dollar in the near term.

“The expected lingering exchange rate pressure also implies that domestic inflationary pressures will be sustained over the rest of the year, more so that PMS prices are expected to remain high. Given the CBN’s low international foreign currency liquidity position, foreign investors may demand higher yields on Nigeria’s sovereign instruments, making the country’s external borrowing costs remain prohibitively high.

“Asides from the lack of will to approach the IMF for funding assistance, Nigeria’s unwillingness to embark on currency and fiscal reforms has been at the core of the reasons the country has been unwilling to meet the IMF for funding support. Thus, given that the government is rapidly churning out reforms after embarking on FX and PMS subsidy reforms, we believe this is the perfect opportunity for the country to approach the IMF for funding support, “they said.

“In this instance, the government will not need to do much as the majority of what the IMF will demand, as conditions are what the country is already embarking upon. In our view, removing gasoline subsidies and floating the currency without plans to boost the FX supply in the short term will take the country back to where it was before the reforms. Indeed, recent developments in the FX space suggest the CBN is managing closing rates at the official FX market, given that the exchange rate, in recent times, has been trading within the N740.00 – N780.00/USD band despite the meagre FX supply relative to demand.

“Over the medium term, diversifying the economy’s export base is paramount to solving the reoccurring exchange rate issues. Nigeria needs to look beyond crude oil and earn more from stable exports – it is non-negotiable,” the report added.