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Market | Forex

Nigeria's Foreign Exchange Reserves Remain Under Pressure

Feb 08, 2023   •   by United Capital Research   •   Source: United Capital   •   eye-icon 215 views

According to the Central Bank of Nigeria (CBN), Nigeria’s external reserves declined by 7.6% y/y to $37.0bn in Jan-2023 compared to its $40.0bn print in Jan-2022. On a monthly basis, Nigeria’s external reserves fell by $86.6mn from $37.1bn at the close of Dec-2022. The decline in dollar flows can be mainly attributed to weak crude oil sales (Nigeria’s primary source of dollar inflow) owing to low production levels compared to the OPEC quota. In addition, Foreign Portfolio Investments (FPIs) flows have been poor, as evidenced by the 20.9% q/q decline to $757.3mn in H1-2022 while abysmal foreign investor participation in the equities market is further evidence.
 
In a bid to boost Nigeria’s foreign exchange earnings over the next couple of years, the CBN initiated the "Race to $200.0bn programme" in Mar-2022. The R200 Policy seeks to generate $200.0bn dollars in FX earnings from non-oil proceeds over the next five years, thereby insulating the economy from FX shocks and shortages. As of Sep-2022, the CBN had only repatriated $1.3bn from the programme, of which $870.0mn was sold at the I&E window. Thus, it can be said that this programme has not granted significant returns as non-oil exports declined by 35.1% q/q in Q3-2022. Overall, the average turnover in the I&E declined 38.6% m/m to $99.5mn in Jan-2023 from $162.0mn at the end of 2022, primarily due to the low dollar supply in the economy.
 
We note that the decrepit FX war chest was one of the considerations for Moody’s Investor Service in its downgrade of Nigeria’s foreign and local currency ratings. This implies that the Federal Government cannot source funding in the international debt market amid the elevated global interest rate environment. For FPIs, we expect investors to continue to favour developed markets with higher interest rates and less risky assets. In addition, we believe that the uncertainties surrounding the upcoming general elections will deter investors as they wait things out. However, the recent increases in crude oil output can serve as a potential tailwind to improve export receipts amid moderately high energy prices.

 

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