External reserves to dip $1.7b for forex backlog, forex forward contracts
By Jeph Ajobaju, Chief Copy Editor
External reserves are expected to decline by $1.7 billion as the Central Bank of Nigeria (CBN) clears foreign exchange (forex) backlog payment to foreigners and forex forward contracts by October 2022.
External reserves are bleeding partly due to CBN intervention in the forex market to stabilise naira exchange rate.
The pending payment is contained in a World Bank report titled, “Nigeria Development Update (June 2022): The Continuing Urgency of Business Unusual”.
“Boosted by higher oil exports, International Monetary Fund [IMF’s] Special Drawing Rights allocation in August 2021, and a Eurobond issuance in September 2021, gross official reserves rose to US$41.3 billion (7.4 months of imports) at the end of 2021; offering an opportunity for exchange rate adjustment.
“Nigeria issued additional Eurobonds for US$1.25 billion in March 2022. However, gross FX reserves are projected to decline during 2022, as the CBN is expected to clear the FX backlog to foreigners (estimated at US$1.7 billion as of end-October) and FX forward contracts,” the World Bank said.
It projects that Nigeria would experience net portfolio outflows in 2022 due to the hawkish monetary policy in developed countries.
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Low net inflows expected
“FPI inflows grew significantly in 2021, exceeding US$6 billion (1.4% of GDP). This followed a significant decline in 2020 in the wake of the COVID-19 pandemic when net outflows reached US$3.6 billion (0.8% of GDP).
“With the continued hiking of interest rates in the US and other advanced economies due to rising inflation, net portfolio inflows to Nigeria are expected to drop under 1% of GDP in 2022,” the World Bank added, per Nairametrics.
“The pre-election environment is also likely to add to the hesitance of portfolio investors, keeping net inflows low.”
Foreign reserves explained
Foreign reserves are assets held on reserve by the central bank of a country used to back liabilities and influence monetary policy.
They include foreign banknotes, deposits, bonds, treasury bills, and other foreign government securities, according to Nairametrics.
These assets serve many purposes but are mostly ensure a government or its agency has backup funds if national currency rapidly devalues.
Foreign exchange reserves are also called international or external reserves.
Nigeria’s external reserves received a $5.15 billion boost in 2021 through $4 billion Eurobond secured in September 2021 and $3.35 billion IMF facility under Special Drawing Rights.
External reserves stand at $38.69 billion in June 2022, down from $41 billion in 2021.
Capital importation declined 47.6 per cent year-on-year in the first nine months in 2021 (9M 2021) to $4.52 billion compared with $8.61 billion (9M 2020).
FDI accounted for 7.55 per cent, per National Bureau of Statistics (NBS) data.
