Steady Decline in Nigeria's External Reserves Spark Fresh Concerns Around Exchange Rate Regime

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Friday, March 06, 2020 /09:28 AM / By FBNQuest Research / Header Image Credit: FX Mallam


The steady decline in Nigeria's external reserves has sparked fresh concerns around the country's exchange-rate regime. The principal reason for the trend decline has been the exit of foreign portfolio investors (FPIs). However, in light of the recent Covid-19 outbreak, there is the additional vulnerability to falling oil prices which could bring further depletion of reserves. Over the past three years, the CBN's fx reforms have improved liquidity. The several exchange rates in operation have been relatively stable. The CBN's interbank/official rate (for priority transactions) is currently N307/US$. This compares with N366/US$ at the Investors and Exporters (I&E) window.


Oil receipts (including oil related taxes) contribute to external reserves. The crude oil price averaged US$56/b in February, compared with US$64/b in January. To date, this downward trend has had limited impact on the stability of the fx market. OPEC has proposed a new agreement on output restraint, which, if endorsed by Russia and others, would provide some comfort.


In Q4 2019 the CBN barred domestic non-bank players from the market in OMO bills. The returns on these bills are among the highest available anywhere for FPIs. However, the current global health crisis appears to have slowed inflows from FPIs, and prompted some to exit the market.


The I&E window has therefore become increasingly dependent upon local sources (including CBN) for fx supply. Based on data from FMDQ, inflows from FPIs in February amounted to US$1.0bn, accounting for 25% of the total inflow. The CBN's share was 51% (US$2.1bn) of inflows at the I&E window.


The CBN has also supported the fx market by providing liquidity through various interventions. For instance, its secondary market intervention sales (wholesale and retail combined) totalled US$3.2bn in Q4 2019, compared with US$3.3bn in the third quarter.


In addition, through the CBN's Chinese yuan interventions, mainly geared towards manufacturers, CNY107.4m (US$16m) was injected into the market in Q4 2019. December is usually slow with regards to business activity, resulting in lower currency demand.


Last month the CBN issued another circular on fx transactions. It stipulated that all domiciliary account holders can utilise cash deposits not exceeding US$10,000 by transfers to fund eligible transactions. One purpose of this administrative measure is a bid to control money laundering.


On Tuesday the US Federal Reserve announced an emergency rate cut of 50bps, bringing its benchmark interest rate to a target range of 1.00%-1.25%. This move was in response to the growing economic threat from Covid-19 and is the first emergency rate cut since December 2008.


The rate cut is a positive for Nigeria and EM generally although increased panic in the global economy would offset the benefit. It remains our view that authorities have no wish to change the fx regime and that they should be able to avoid such a step. Their room for manoeuvre is narrowing, however. The proposed Eurobond issue, once market conditions have steadied, would help to calm nerves.

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