Thursday, July 08, 2021 / 08:40 AM / by FBNQuest
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CBN data show that gross official reserves declined by USD910m to USD33.32bn in June. For a more accurate picture, we should adjust this gross figure for the pipeline of delayed external payments. Total reserves at end-June covered 7.6 months' merchandise imports on the basis of the balance of payments for 2020, and 5.5 months when we add services. The cover is a little flattering. Fx has been in short supply under life with Covid-19, and Nigerians have made limited use of their education, health and business travel allowances due to restrictions on movement both at home and in their favoured destination countries. On the return of normality (whatever shape it takes), they will make good use of these allowances, the net deficit on services will rise strongly and the import cover will deteriorate.
This latest decline in reserves is not, however, grounds for alarm since we identify a number of sources of accumulation. The first is Eurobond issuance. We recall that the Debt Management Office is mandated to raise NGN2.34trn (USD5.69 at the I&E rate) from the market by way of external financing in 2021. The Nigerian Senate has now reportedly approved the lending.
The second is the IMF's proposed allocation of SDRs for its members. A blog posted yesterday by the Fund's managing director, Kristalina Georgieva, disclosed that the executive board has discussed an allocation equivalent to USD650bn and that she anticipates the completion of the process by end-August. SDRs are issued to members by the Fund and are a reserve asset that can be exchanged for a convertible currency with a central bank.
At this stage we do not know the size of the new country allocations. If hypothetically, Nigeria's was to be its current quota, the accumulation would be about USD3.50bn. Georgieva also hoped that richer nations would agree to "voluntary channelling" of their allocations to the "poorest and most vulnerable states", which could, in conjunction with other steps, amount to an additional transfer of up to USD100bn. Whether Nigeria qualifies is highly debatable, given that it is not classified as low income.
A third source would be soaring revenue from oil exports. The crude price for UK Brent is comfortably above USD70/b and yet reserves have continued to decline. The abandonment of OPEC+'s latest meeting is open to many interpretations, the most negative being that it marks the loss of the discipline of the alliance that has underpinned the price over the past 12 months. Alternatively, Saudi could rebuild its relations with the UAE.
A fourth would be the release of multilateral loans to the FGN such as the World Bank's mooted USD1.5bn credit . Conditionality rears its head in this case and we urge caution.
Official reserves (gross; USD bn)
Sources: CBN; South African Reserve Bank (SARB); Central Bank of Egypt (CBE); FBNQuest Capital Research