Bloomberg disclosed in its recent report that Nigeria is depleting its foreign exchange reserves at a rate unprecedented in the last four years.
The global leader in business and financial information raised concerns that the Central Bank of Nigeria (CBN) is depleting its dollar holdings to support the Naira after pledging it would allow the currency to float more freely.
Nigeria’s liquid reserves declined 5.6% since March 18, when the naira started rebounding from record-low levels against the dollar to $31.7 billion as of April 12, according to Bloomberg’s calculations based on the latest available data from the Central Bank of Nigeria. That’s the most significant decline in a similar period since April 2020, according to data compiled by Bloomberg.
The report noted that Nigeria’s currency has recovered most of its losses since a 43% devaluation in January. That came after the CBN introduced measures to improve liquidity, attract capital inflows and allow the market to determine the naira’s exchange rate. The CBN pledged to clear a backlog of pent-up dollar demand as part of the reforms.
“The CBN does appear to be using its FX reserves to clear the valid backlog and return the naira to a realistic exchange rate,” said Charles Robertson, the London-based head of macro strategy at FIM Partners.
“My assumption is they hope to encourage others—local and foreign investors—to start investing in the local currency, and return private sector liquidity to the foreign exchange market.”
Meanwhile, Nigeria still has a sizable cushion of foreign exchange reserves, buoyed by a rally in oil prices and inflows from multi-lateral loans. According to the International Monetary Fund, gross reserves of around $32.6 billion cover about six months’ worth of imports.
The CBN said last month it had cleared a backlog of overdue dollar purchase agreements estimated at $7 billion since the beginning of the year. That was built over years as the central bank pegged its currency against the dollar, leading to a scarcity of foreign currency that deterred foreign portfolio investment. However, it’s unclear how much dollar debt the CBN retains on its books.
The publication of the CBN’s financial statements late last year showed it had securities lending agreements with JP Morgan Chase & Co. for $7 billion and another $500 million with Goldman Sachs Group Inc. It is not clear if those obligations have been settled. A spokesperson for the central bank didn’t immediately respond to Bloomberg’s telphonic request for comment.
The FX reserves have fallen despite a surge of inflows into capital markets following 600 basis points of cumulative interest rate hikes in February and March, which increased the allure of Nigerian local debt. According to the central bank, foreign portfolio inflows exceeded $1 billion in February, bringing total receipts so far this year to at least $2.3 billion.
“The CBN will also be aware that new inflows, from Afreximbank, the World Bank, and a possible Eurobond, plus the benefit of higher oil prices and a likely return of remittances via official and semi-official channels (rather than bitcoin), will allow reserves to stabilise or rise again,” Robertson said.
