Wednesday, January 07, 2015 10:35 AM / FBN Capital Research
Data from the CBN show that official reserves decreased by US$2.3bn in December to US$34.5bn. This latest fall is the result of the sharp decline in fx inflows from the oil industry and the related exit of some offshore portfolio investors.
The end of the holiday season may have applied the brake to import demand but the more significant development has been the halving of the oil price over the past six months.
The CBN feels that fx demand is in part speculative and has therefore issued a number of circulars. On 17 December it ruled that authorised dealers must have flat fx positions at the close of each trading day rather than the previous 1% of shareholders’ funds.
The following day it logically added that banks’ customers had to utilise fx bought on the interbank/autonomous markets within 48 hours, failing which it had to surrender it to the CBN.
We suspect that these circulars will, over time, prove to be porous. Our greater concern is the further depletion of offshore holdings of Nigerian securities in the face of pressure on the oil price and hence on the naira exchange rate.
Clearly the CBN cannot continue to draw down reserves at the rate of more than US$2bn per month for long. Since the oil price is not expected to rebound quickly and since the CBN is unlikely to adopt a floating exchange rate regime, we should prepare for additional administrative measures.
At current levels, Nigeria’s external reserves are sufficient to provide cover for 7.7 months of merchandise imports. The latest data (from end-June) put the CBN’s share of official reserves at 80% of the total.