Forex Reserves Rise To $33.2 Billion Amid Optimism On Oil Earnings

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Forex Reserves Rise To $33.2 Billion Amid Optimism On Oil Earnings

Nigeria’s foreign exchange (forex) reserves have risen to $33.25 billion amid optimism that the country may surpass its crude oil earnings’ projections.

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

Brent crude oil price inched higher by 1.6 per cent 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.

The International Energy Agency (IEA) had revised its 2024 demand forecast upward to 1.24mbpd

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

Nigeria’s external reserves, which closed 2022 at about $37.08 billion, had peaked at $37.211 billion on January 16, 2023. It then suffered a streak of long losses as the Central Bank of Nigeria (CBN) struggled with extremely volatile currency depreciation.

The naira, however, remained under pressure at the forex markets. At the Nigerian Autonomous Foreign Exchange Market (NAFEM)- the market-driven, government-recognised market, the naira depreciated by 1.3 per cent to N902.45 per dollar. At the parallel market, the extensive though undetermined “black market”, the naira was weaker by 7.6 per cent to close at N1,340.00 per dollar.

The momentum of activities at NAFEM also dropped by 33.3 per cent to $505.8 million.

Most analysts expected the naira to remain under pressure in the meantime citing significant demand-supply mismatch.

Cordros Capital stated that forex liquidity conditions would 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 stated that it was considering Nigeria’s request to provide $1.5 billion in financing to support key policy reforms.

The Development Policy Financing (DPF) provides direct budget financing and supports countries with reforms to policies and institutions that boost economies and specific sectors.

President, Association of Capital Market Academics in Nigeria, Prof. Uche Uwaleke, 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 however explained that increase in forex reserves was a positive development for the Nigerian forex market.

Managing Director, Arthur Steven Asset Management, Mr. Olatunde Amolegbe, had also said the continuing increase in forex reserves will support government’s current efforts aimed at fostering 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 stabilize the exchange rate of the naira or even strengthen it against the dollar if the increase is steady and consistent,” Amolegbe said.

He however noted that the government would need to improve on existing forex market structure.

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

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By Abia ThinkTank

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