Sunday, March 06, 2022 / 06:00 AM / by Proshare Research/ Header Image Credit:  EcoGraphics

External Reserves & Exchange Rate

The USUS$4bn Eurobond inflow and USUS$3.35bn Special Drawing Rights (SDRs) from the International Monetary Fund (IMF) in the year in addition to stronger oil price boosted the external reserves. The FX reserve rose Y-on-Y by +14.55% which is US5.14bn higher than the corresponding period of the previous year. At the end of the year, the external reserve stood at USUS$40.52bn against USUS$35.37bn at the end of 2020 which can cover imports for about 9months.

Currency pressures continued both at the parallel and official markets of FX supply shortages. The CBN discontinued the sale of FX to Bureaux de Change (BDC) operators, this decision was made in a bid to the CBN's mandate of safeguarding the value of the Naira, ensuring financial stability, and shoring external reserves.

On the FMDQ, FX turnover between January and November 2021 dipped Y-on-Y by -23.00% to USUS$123.6bn from USUS$160.52bn in the same period in 2020. September 2021 had the highest turnover of USUS$17.08bn and the highest M-on-M growth of +87.08%, this was supported by +68.61% and +108.02% M-on-M increase in FX Spot and FX Derivatives turnover respectively. The month of May recorded the lowest turnover and highest M-on-M decline of -41.24% in turnover, on the back of a dip both on the FX Spot and FX Derivatives turnover, both fell M-on-M by -14.87% and -58.43% respectively (see chart 14 below).

Chart 14: FX Turnover (US$'bn) January - November 2021

Source: FMDQ, Proshare Research

The Naira at the I & E FX window averaged at N409.66 against the US Dollar, signifying a Y-on-Y depreciation of +7.94% from the average of N379.53 to the US Dollar (see chart 15 below). Demand pressure induced by the previous year's economic shock has continued to affect the value of the Naira at the official window. Vice President Yemi Osinbajo proposed a market-reflective rate to attract foreign investment and increase FOREX inflows into the economy, but some analysts interpreted this as a depreciation of the domestic currency.

Proshare Analysts believe that the CBN should examine the FX restriction list because the goods on the list are intermediate products, which means that an increase in the price of one will lead to a bigger rise in the price of others. Wheat is an example of such a commodity. We are also not opposed to the devaluation of the local tender, as this policy move will reduce the trade deficit by making exports cheaper. As an import-dependent country that relies heavily on oil and other basic resources with little added value, such a policy move would be useless. Diversifying FX revenue before the depreciation of the Naira, on the other hand, will yield a better outcome and enhance Naira's position.

Chart 15: Average I & E FX Window (USUS$/N) January - November 2021

Source: FMDQ, Proshare Research

The projected increase in oil prices, as well as the withdrawal of the PMS subsidy, will have a significant impact on the nation's foreign reserve position.  However, with the proposed transport grant of N5000 between 30 - 40 million poor Nigerians and the CBN's continued FX management, the external reserves will likely remain at current levels or see a slight appreciation. The N6.39trn budget deficit for 2022 the government intends to raise N2.57trn each both at the domestic market and international market and N1.16trn from multilateral and bilateral institutions to finance the budget deficit.