Increased foreign exchange inflows expected in 2017 to stabilise naira

A more stable exchange rate will be achieved in 2017 on the back of expected increase in foreign exchange inflows. The increased inflows are expected on the back of several initiatives already taken by government, which could translate into improved inflows of dollars into the country.

The first source of major dollar inflow expected in early 2017 is the proceeds of the US$1 billion Eurobond which the Debt Management Office (DMO) and the Ministry of Finance have already finalised plans to issue by March at the latest. The offer will be fully subscribed as several institutional investors have already indicated interest. The recent rise in crude oil prices is also expected to result in a favourable pricing for the issue.

Besides the US$1 Eurobond, the Federal Government is in negotiations with different multilateral lending institutions, including the World Bank, the African Finance Development Bank (AfDB), among other institutions, which is expected to translate into increased dollar inflows. In November 2016, AfDB gave Nigeria US$600 million of an agreed US$1 billion loan. The balance of US$400 million will be given to the country this year.

The country also has an agreement in principle with the World Bank for a US$2.5 billion facility. The Federal Government is expected to tap into this agreement this year, as part of its US$30 billion borrowing plan.

Prepayment agreement signed with India for crude oil sales will also bring in addition dollar inflows into the country in 2017. Ibe Kachikwu, minister of State for Petroleum Resources, has an agreement in principle with India for prepayments of up to US$15 billion for the country’s crude oil. Some payments on the back of this agreement are expected this year once they are finalised.

But the biggest source of improved dollar inflows in 2017 will be higher crude oil production and the higher prices of crude oil in the international markets. At an average crude oil price of US$55 per barrel and average production of 2.0mbpd, the country’s oil export earnings is expected to rise by a minimum of US$11 billion, boosting external reserves and strengthening the capacity of the Central Bank of Nigeria (CBN) to defend the currency.

Analysts at FBNQuest note that, “Over time, other inflows will materialise. These could include sizeable multilateral loans, an asset sale or two and advance payments for crude oil. Ours is the scenario of the piecemeal solution to the exchange rate impasse. A number of transactions finally trigger the autonomous inflows on a scale to make the liberalisation a reality. “The regime may not be floating but could then be termed ‘market-driven’ (to use the CBN’s own words). This process would be more rapid, as the Egyptian example shows, if the FGN was prepared to take IMF loans. Such a step, however, is off-limits for historic reasons.”

Foreign investors have largely stood on the side lines of Nigeria’s interbank foreign exchange market because of the fear that the low liquidity in the market would make it difficult for them to repatriate the proceeds of whatever investment they bring in. The improvement in inflows is therefore expected to trigger their return to the market, which would reduce the pressure currently being experienced on the naira.