Forex Reserves Rises to $33.2b Amid Optimism on Oil Earnings

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Being surrounded with optimism that the country may surpass its crude oil earnings’ projections, Nigeria’s foreign exchange (forex) reserves actually rose to $33.25 billion.

The nation’s forex reserves went up by $140 million to close the weekend at $33.25 billion, sustaining a build-up that raised expectations of a stronger outlook among analysts. The reserves, which closed 2023 at $32.91 billion, closed penultimate week at $33.11 billion.

Brent crude oil price went up by 1.6 percent to $78.48/bbl at the weekend as escalating tensions in the Middle East, and disruptions in the United States stoked fears of supply shortage.

Analysts at Coronation Asset Management said they anticipated that the global crude oil price will stay over the government’s 2024 budget assumption of $77.96 per barrel.

Nigeria’s external reserves, which closed 2022 at about $37.08 billion, peaked up at $37.211 billion in January 2023. It then suffered a streak of long losses as the Central Bank of Nigeria (CBN) struggled with currency depreciation.

The naira, however, remained under pressure at the forex markets, and the force of activities at the Nigerian Autonomous Foreign Exchange Market (NAFEM) also dropped by 33.3 percent to $505.8 million.

Most analysts expected the naira to remain under pressure in the meantime as they cited a significant mismatch in demand-supply. Cordros Capital said forex liquidity conditions will remain tight, pending receipt of expected forex inflows.

“Thus, we expect the pressure on the local currency to persist in the near term. Nonetheless, we expect foreign investors to keenly watch the development in the forex space with regards to the expected forex inflows as guided by the authorities, CBN’s recent actions in clearing its forex backlogs, and firm direction of short-term interest rates,” Cordros Capital stated.

The World Bank had said it was considering Nigeria’s request to provide $1.5 billion in financing to support key policy reforms, while the Development Policy Financing (DPF) provides direct budget financing and supports countries with reforms to policies and institutions that boost economies and specific sectors.

Prof. Uche Uwaleke, President of the Association of Capital Market Academics in Nigeria, said Nigeria needs to curb excessive import dependence to support its forex recovery. “It goes without saying that export- base diversification remains the only sustainable solution to the present forex crisis.

“The strategy of the government appears to focus on the supply side involving borrowing dollars to improve liquidity in the near term. But it may not record any significant success except the unbridled demand for forex is dealt with.

“To curb the demand pressure, I suggest the government should compel a change in consumption behaviour by enacting a ‘Buy Nigeria law’ akin to the ‘Buy America Act’ of 1933 and recently the ‘Build America, Buy America Act’ of 2021. Also, Nigeria’s import data support revisiting and scaling up the CBN’s currency swap deal with the Peoples Bank of China.

“Given that the bulk of Nigeria’s imports are from China, it stands to reason, therefore, to explore ways of bypassing the dollars, and settling these transactions in the Yuan. This was the idea behind the currency swap with China, which was largely inadequate in size. In order to increase the stock of Yuan in our external reserves, Nigeria can issue panda bonds, which are bonds denominated in the Chinese Yuan and are considered cheaper than Eurobonds,” Uwaleke said. He explained that increase in forex reserves was a positive development for the Nigerian forex market.

Managing Director of Arthur Steven Asset Management, Mr. Olatunde Amolegbe, also said the continuing increase in forex reserves will support government’s current efforts aimed at promoting liquidity and stability at the forex market.

“The increase is a positive signal for improved liquidity in the forex market. This should ultimately help to stabilise the exchange rate of the naira or even strengthen it against the dollar if the increase is steady and consistent,” Amolegbe said, noting that the government would need to improve on existing forex market structure.

According to him, the government needs to make it a structure that is more transparent and discourages arbitrage, and rent seeking will need to be put in place as a matter of urgency.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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