According to figures from the central bank, nearly 30% of Nigeria’s foreign exchange reserves, which printed at $35.2 billion, were comprised of traded foreign currency. As a result of the invasion of foreign currencies with high economic productivity, the naira has been in a downward spiral due to a smaller foreign exchange buffer.
Nigeria’s external reserve accumulation slows down considerably as a result of the meager hydrocarbon sales revenue inflows. The Organisation of Petroleum Exporting Countries confirmed in a report that Nigeria’s production grew to an average of 1.3 million barrels per day (mbpd) in the first quarter of 2023.
In July 2022, oil output, including condensates, dropped to 1.1 mbpd from 2.1 mbpd in 2019, averaging 1.5 mbpd for the entire year, according to a report from Fitch. This decline was attributed to oil theft, pipeline vandalism, aging infrastructure, and a lack of investment.
By restarting the Forcardos terminal and Trans-Niger pipeline as well as tightening up onshore monitoring to combat theft, it was stated that production increased to 1.6 mbpd in March.
Fitch predicts a further rise to 1.75 mbpd in 2024 due to increasing infrastructure spending on the oil industry and the government’s acceleration of new oil discoveries for commercial extraction.
“There will be a significant increase in refining capacity in 2023 when the Dangote plant begins operations (with an eventual 0.65 mbpd capacity), reducing import costs,” Fitch said in a statement.
Tolu Osinibi, chief executive of FSDH Capital, claimed that the CBN restricted the supply of foreign exchange to invisibles by nearly half as a result of the low level of its reserves in an interview with MarketForces Africa.
Foreign currency has not been continuously rationed, and neither the official window nor the black market have benefited from this. The exchange rate has gotten worse and has become crucial to Nigerians’ ambitions to leave the country.
According to the Chief Executive of FSDH Capital, gross foreign reserves would be at their lowest level after you take into account outstanding forwards, swaps, redemption of eurobonds, etc. According to Osinibi, the apex bank has been putting off paying out on its foreign currency sales at retail auctions.
“Adjusting the FX rate to allow for some depreciation in order to be able to draw actual FX flows into the system is the sustainable option.
Foreign portfolio investors may not trust any changes to FX policy that are made before the next Administration takes office at the end of May 2023 because there are still some credibility concerns. The $35 billion in gross external reserves should also be kept in mind.
After accounting for all legally-binding agreements, such as sold forwards and swaps that must be unwound, etc., we have no notion what the net reserves position is. Fitch calculated that the FX swap commitment in its rating note for Nigeria is around 30%.
In order to control external pressures, there is still a significant amount of use of import and foreign exchange (FX) limitations, various exchange-rate windows, and constrained flexibility of the primary “I&E” rate.
Due to this, the private sector experiences acute foreign currency shortages, there is a significant difference between the official and parallel exchange rates, and there have been significant private sector capital outflows over the past year as a result of weak foreign investment.
International reserves decreased from USD39.2 billion in July 2022 to USD35.3 billion in April.
This supports our prediction that foreign exchange reserves will decrease from 4.9 months of current external payments at the end of 2022 to 4.0 months at the end of 2024 due to weak capital inflows.
Despite Fitch’s assessment that about 30% of Nigeria’s reserves are made up of FX swaps, this is still significantly more than the expected “B” median of 3.3 months.
Due to oil theft, pipeline vandalism, outdated infrastructure, and a lack of investment, oil output (including condensates) decreased from 2.1 mbpd in 2019 to a low of 1.1 mbpd in July 2022 and averaged 1.5 mbpd for the entire year.
The restart of the Forcardos terminal and Trans-Niger pipeline, as well as an increase in onshore surveillance to combat theft, helped production rebound to 1.6 mbpd in March.
Fitch forecasts a further increase to 1.75 mbpd in 2024. There will be a marked increase in refining capacity in 2023 when the Dangote plant commences operations (with an eventual 0.65 mbpd capacity), reducing import costs.
There remains extensive use of foreign exchange (FX) and import restrictions to manage external pressures, with multiple exchange-rate windows at the Central Bank of Nigeria (CBN), and limited flexibility of the main “I&E” rate.
Fitch projects the current account balance, which improved by 1 percentage point in 2022 to a surplus of 0.2% of GDP, worsening to a deficit of 0.8% of GDP in 2024, on less favourable terms of trade.
Analysts define a foreign currency swap as a deal between two nations to switch the interest rates on their respective loans in their distinct currencies. The agreement may also call for exchanging loan principal sums.FX swaps make about 30% of Nigeria’s foreign exchange reserves.
