Building the external reserves and stabilising the naira to restore investors’ confidence are some of the challenges Olayemi Cardoso, the new governor of the Central Bank of Nigeria (CBN), will have to tackle, according to analysts.
Nigeria’s external reserves have maintained a steady decline in recent months, dropping to $33.29 billion as of September 15, 2023, data obtained from the CBN website showed.
Year-to-date, the external reserves, which gives the CBN the firepower to defend the naira, has declined by 10.17 percent from $37.06 billion at the beginning of the year.
The decline in the reserves followed low dollar inflows from oil proceeds as well as rising debt service payments and foreign exchange swap transactions.
Consequently, the pressure on the naira has continued unabated at the foreign exchange market due to increased demand for dollars.
The naira on Tuesday fell to all-time low of N962 per dollar at the parallel market, popularly known as the black market.
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Some analysts are suggesting that the Nigerian government should embrace multilateral loans to help shore up the reserves and to defend the local currency.
“I think the first and immediate step is to focus on generating FX, which may include raising funds in the Eurobond market, and bilateral and multilateral funds while building confidence to attract FX in the medium term,” said Ayodeji Ebo, managing director/chief business officer at Optimus by Afrinvest.
He said the gap between the official and parallel market rates should also be closed to attract export proceeds and diaspora remittances to ease the pressure.
“He needs to ensure stability before tapering the interest rates. A lower interest rate environment will spur speculation in FX,” Ebo said.
“Two things come to mind. The first is for the CBN to clear the FX backlog,” Tunde Abidoye, equity research analyst at FBN Capital, said.
He said there is no easy way to do this, given the encumbrances to a portion of the reserves, and that the country may have to get a loan to augment outflows from the reserves.
“The CBN must also impress the urgency of addressing the issues of oil theft and low oil productivity on the fiscal authorities,” he said.
Abiodun Adedipe, chief consultant at B. Adedipe Associates Limited, an indigenous business management consulting firm, has set an agenda for the new CBN governor.
On FX rate, he said the first thing is to extinguish all matured obligations (the futures). “Secondly, to assure all stakeholders that going forward, legitimate maturing obligations will be paid and thirdly, to revisit restrictive policies on sale of FX by oil and gas operators.”
He said the new CBN boss should investigate Bureau De Change licensing and restore order to that space, adding that this might be by way of licence revocation for errant operators or introduction of minimum capital requirement plus compulsory membership of and commitment to the Association of Bureau de Change Operators of Nigeria.
Adedipe called for a focused incentive for domestic manufacturing, especially for export, saying that the Monetary Policy Rate (MPR) at 18.75 percent “is counterproductive and has not been an effective tool in taking inflation or encouraging capital inflows”.
He said the CBN should start a steady reduction of the MPR from next week’s MPC meeting. “Return Treasury bills pricing to indexing to MPR and allow retail investors – discard the minimum of N50 million set by the immediate past CBN governor. Actively engage the commercial and investment banks in moral suasion on lending rates. Restore the importance and relevance of microfinance banks and engage them to handle interventions for micro, small and medium enterprises.”
“In general, he should be circumspect in utterances and conduct, so as to rebuild the stakeholder confidence and trust that were eroded during the last era,” Adedipe said.
Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise, said the first thing the new CBN governor should do is to ensure good corporate governance.
He said the external reserves are not strictly within his limits but that whatever comes to the reserves, he manages it to defend the naira.
Yusuf noted that there is no long-term funding in the financial sector and that about 90 percent of funds in the banking system are less than one year tenor.
He said the spread between lending and deposits in the banking system is too wide and it is not good for the economy.
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Following the recent publication of the audited financial statements of the CBN, analysts at Vetiva Research undertook the computation of net international reserves (2022) following the specific guidelines outlined in the International Monetary Fund’s Assessment of Reserve Adequacy Guidance Note Definition.
This process essentially entails subtracting short-term foreign currency liabilities and off-balance sheet items from the total gross reserve position.
“Utilising the conversion rate of N461.50/$ (as stated in the financials), we arrived at a net international reserve position of approximately $22.2 billion,” the analysts said in a new report.
“Moving on to debt-related measure, we assessed the capacity of reserves to cover short-term external debt and observed that Nigeria and South Africa excel in this assessment, even though there have been net reserve adjustments in the case of Nigeria.”
The report by Vetiva noted that Nigeria has successfully repaid its $500 million Eurobond and does not face any external debt maturities in 2024.
“Nigeria’s reserves are fully sufficient to cover its current account, which is in a surplus position. Consequently, the debt-reserve metric for Nigeria is deemed adequate. South Africa equally has enough reserves to cover its short-term external debt.”
The central bank receives foreign exchange inflows from crude oil sales and other sources of revenue on behalf of the government. Such proceeds are purchased by the bank and the naira equivalent credited to the Federation account.
These proceeds are shared each month, in accordance with the constitution and the existing revenue sharing formula. The monetised foreign exchange, thus, belongs to the CBN. It is from this portion of the reserves that the Bank conducts its monetary policy and defends the value of the naira.
