Central Bank of Nigeria to spend $1.7billion to clear FX backlogs by September – IMF

The World Bank has stated that Nigeria’s external reserves are expected to decline as the Central Bank of Nigeria (CBN) is expected to clear $1.7 billion worth of FX backlog and FX forward contracts to foreigners by the end-October 2022.

This was disclosed by the World bank in a document titled ‘Nigeria Development Update (June 2022): The Continuing Urgency of Business Unusual.

Nigeria’s external had been on a downward trend due to the continuous intervention by the Central Bank in the FX market in order to ensure the stability of the local currency.

What the World Bank is saying

The World Bank said, “Boosted by higher oil exports, International Monetary Fund’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 Bank added.

The World Bank also projects that Nigeria would experience net portfolio outflows in 2022 due to the hawkish monetary policy seen in developed countries. The bank said “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).

The World Bank stated that “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 pre-election environment is also likely to add to the hesitance of portfolio investors, keeping net inflows low.”

What you should know

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.

These assets serve many purposes but are most significantly held to ensure that a government or its agency has backup funds if their national currency rapidly devalues. Foreign exchange reserves are also called international or external reserves

Nairametrics reported earlier in the year that Nigeria’s external reserve received a boost of $5.15 billion in 2021, bolstered by the $4 billion Eurobond secured by the federal government in September 2021 and the $3.35 billion IMF facility under the Special Drawing Rights. However, at the time of writing, Nigeria’s external reserves stand at $38.69 billion far away from the $41 billion seen last year.

Capital imported to Nigeria declined by 47.6% year-on-year in 9-month 2021 to $4.52 billion compared to $8.61 billion recorded in the previous year, with foreign direct investment (FDI) only accounting for 7.55% of the total, based on NBS data.