Global rating agency, Fitch, sees the external reserves of Africa’s biggest economy rising to $42 billion by the end of 2021, the highest since September 2019, courtesy of a projected average oil price of $53 per barrel.
That would come as a positive development as it will give the CBN legroom to intervene in the Fx market, according to Boboye Olaolu, Sub- Saharan economist, at securities trading firm, CSL Stockbrokers.
“It will also improve our import cover and boost investors’ confidence in the market,” Olaolu said.
Nigeria’s external reserve came under intense pressure last year following a crash in dollar inflows, triggered by the coronavirus pandemic, constraining the apex bank’s ability to defend the naira against the dollar.
The reserve, which is seen as a war-chest to cushion the effect of external shocks, fell to a record low of $33 billion in March, according to CBN data; and it only a $3.4 billion emergency support facility from the International Monetary Fund, that saved the reserve from falling further.
The naira fell by 8.2 percent against the dollar at the Investors and Exporter window, while it lost about 23 percent at the parallel market in 2020.
The reserve however settled slightly over $35 billion, down from the $38 billion it started the year with.
Fast forward to 2020, Nigeria’s reserve has headed north, gaining nearly $1 billion, helped by an increase in petrodollars.
Brent Crude, the benchmark for Nigeria’s oil, trades at $55.10 per barrel, 4:11 pm, Nigerian time, on coronavirus vaccine optimism, and a move by members of OPEC to cut oil supply in the international market.
Fitch expects oil price to average $53 per barrel this year compared to the $43.1 per barrel recorded in 2020.
Although an accretion in the reserve would not only help the CBN in keeping the naira stable, it will also give the apex bank the firepower to clear-off the $729 million backlog of dollar demand, Fitch says it expects another round of devaluation this year as Africa’s biggest economy unifies exchange rates across Windows to access a $1.5 billion loan from the World Bank.
“We consequently expect the naira to weaken further, ending the year at N438/$ (10.1 per cent below end-2020 levels) and averaging N408.50 (7.2 per cent below the 2020 average),” Fitch added.
Africa’s biggest economy is currently in recession after contracting 6 percent and 3 percent last year. The country is planning to spend its way out of recession, approving a record N13 trillion budget in 2021.
While the country is increasing spending this year, a major downside is high inflation which quickens to a 3-year high at N15.75 in December.
Fitch noted that “while we continue to think that a free float is unlikely given its probable impact on already high inflation, we forecast that inflation will rise to 14.6 per cent in 2021, compared to an average of 13.2 per cent in 2020. The CBN will likely seek to at least partially yield to World Bank pressure and weaken the official naira rate further to mitigate the growing gaps between the official naira rate and market-determined exchange rates, including the parallel market rate.”
