External reserves shed $975.7m year-to-date as free fall continues
•CBN scales down investment component
•Naira faces fresh volatility, nears N600/$ at P2P trading segment
Nigeria’s foreign reserves continued its downward slope, a trend formed towards the end of last year after it failed to sustain a momentary recovery witnessed in October.
The gross figure, which has remained a consistent gradual depletion in the past five months, dropped to $39.54 billion on Tuesday. Year-to-date (YTD), the external reserves shed $975.7 million.
Last year closed with an estimated reserve gross value of $40.52 billion. The reserves suffered a wobbling performance last year, tumbling below $34 billion at some point.
A breather, however, came with $3.35 billion International Monetary Fund (IMF)’s special drawing rights (SDR) and Eurobond issuance. Windfalls from the two sources provided the needed buffer and pushed up the reserves above the magical N40 billion market.
But the move was short-lived. The gross figure had hit $41.8 billion and hovered around that region before a fresh crisis set in. A financial expert, David Adonri, said it was obvious the country could not sustain the momentary recovery as there was an FX hole waiting to swallow the earnings.
Earlier in the year, Bismarck Rewane, the chief executive officer of Financial Derivative Company Limited, projected that the reserves would nosedive to about $32 billion as the monetary authority would require between $8 billion and $10 billion to defend the naira.
The Central Bank of Nigeria (CBN) has continued to intervene in the official exchange to provide much-needed liquidity and sustain the value of the local currency in line with its managed float approach.
The intervention notwithstanding, market volatility continues across market segments. At the official Nigerian Autonomous Foreign Exchange (NAFEX) window, naira currently trades around N415.5/$, sometimes with about N50/$ intra-day trading margin.
FX illiquidity has reached an all-time high (ATH) at the parallel market with naira exchanging for about N585/$ at person-to-person (P2P) platforms yesterday.
Findings have suggested that the majority of FX end users, including local manufacturers and genuine importers, have continued to visit the black market for the FX needs.
A chief executive of a publicly quoted manufacturing company in Lagos told The Guardian that up to 80 per cent of “our FX needs for inputs and others” are sourced from the parallel market as official sources are not available.
Adonri said the resort to black market deals even by users who should be serviced by the official market was a major factor driving up the rate at the P2P segment.
As the external reserves plunge, the CBN may have been scaling down on the component of the figure invested in foreign securities. The reserve management framework allows the apex bank to block a maximum of five per cent of the total figures in securities whose maturity must not exceed 10 years.
Previously, the CBN had blocked as much as six per cent in foreign investment assets. The 15-year average of blocked portions, according to data sourced from the Central Bank, is 2.8 per cent.
In contrast, the currently blocked proportion is 0.5 per cent. It has remained below one per cent since the beginning of last year, suggesting that the CBN may be weaning the reserve off liquidity risk.
But Adonri, who spoke with The Guardian on the subject via telephone, also suggested that the reserves are proceeds of short-term funds, which cannot be invested in assets that have medium or long-term maturity.
Adonri, who raised the alarm that the situation is becoming “precarious”, said: “You cannot borrow and invest the money. A part of the reserve is from loans and portfolio investments, which are short-term in nature. That money cannot be invested. That is possibly the reason the investment component is not much.”
The CBN disclosed that the Naira4Dollar Scheme has boosted remittances from only $6 million per week to over $100 million per week while it has created another policy RT200 FX Programme to shore up FX repatriation from non-oil exports.
But some analysts said poor fiscal incentives and corruption at the ports have continued to threaten earnings from exports. Adonri added that the corruption at the ports would have to be addressed to see a reasonable improvement in earnings from non-oil exports.
He added that Nigeria’s external reserves face a dire situation, as capital importation is likely to dry up as the United States’ money market becomes more attractive. The U.S. Federal Reserve, last week, increased the interest rate by 25 basis points. The increase is part of the Fed’s monetary normalisation, which is aimed at taming inflation.
But Nigeria’s Monetary Policy Committee (MPC) retained the benchmark interest during its Monday meeting. The IMF and the World Bank had warned that emerging markets and developing economies (EMDES) could face capital outflow as the western countries increase interest rates.