There is hope for a stable naira going forward as the expected foreign exchange inflows worth about $6.3 billion will likely give Nigeria’s central bank the firepower to defend the local currency.
The $6.3 billion will come from a Eurobond issuance of atleast $3 billion and the $3.3 billion allocation from the International Monetary Fund’s (IMF) Special Drawing Rights (SDRs) on August 23, 2021, an amount that helps shore up the country’s dwindling external reserves and gives the CBN an edge in its pursuit of a stable currency.
The CBN favours a strong currency and has sold nealy $20 billion in each of the last three years defending the naira against the dollar in a bid to check soaring inflation.
Recent data from the CBN showed that the apex bank sold a total of $1.47 billion to authorised FX dealers in January 2021 alone.
In spite of the sharp rise in crude oil prices, which as of Wednesday, August 4, 2021, stood at $71.35 per barrel, Nigeria’s foreign reserves have remained under pressure so far this year in the absence of any major one-off inflows.
FX reserves fell $1.6 billion in the first half of 2021 leaving the CBN in a tight spot of having to supply FX to the market while conserving the critical reserve level of $33 billion, which the CBN rarely allows reserves to drop below.
Read also: FX liquidity drops in July as naira loses N2
However, with such a large one-off boost to reserves from the proposed Eurobond issuance and IMF SDR allocation, the CBN could start supplying more FX to the market and push for a conversion of the parallel and official rates towards the firm’s projected N430/$, according to Mohamed Abu Basha, head of macro economy at investment bank, EFG Hermes.
Indeed, Godwin Emefiele, CBN governor, was recently quoted as saying the naira’s fair value was N440 per dollar.
“We do not think the move would create much excitement if it is not followed by clear evidence of a build-up in reserves (the lack of this is clearly weighing on investors’ confidence), as well as higher interest rates (in order to attract portfolio inflows, which remain the key foreseeable source of FX supply, in addition to oil),” Basha said.
The Federal Government of Nigeria had in May 2021, disclosed its plans to issue over $3 billion in Eurobonds as international capital markets (ICM) open up and interest rates decline.
The government had planned a Eurobond issue early last year after its sixth sale in 2018, but it decided to defer the 2020 sale due to market turmoil caused by the COVID-19 pandemic.
President Muhammadu Buhari had in a letter to parliament sought approval to raise $6.183 billion from a combination of sources.
Reacting to the development, Taiwo Oyedele, head of Tax and Corporate Advisory Services at PwC, says the facility will help to improve Nigeria’s external reserve and provide FX liquidity at this critical time, which is expected to sustain or strengthen the naira.
In addition, the facility will provide part funding for the country’s budget deficit. Overall, the impact should be positive on the economy if judiciously utilised and it does not come with associated onerous terms, he states.
The naira, which fell sharply to N525/$ last week after the CBN discontinued dollar sales to the BDCs, on Wednesday appreciated further to N506/$.
With the current rate, Nigeria’s FX market has recovered 3.62 percent or N19 lost to the dollar in one week.
“We maintain our view that an FX adjustment is on the way, with the CBN likely utilising upcoming FX inflows to help deliver yet another round of naira adjustment. We think last week’s decision will likely further feed into this adjustment.
“We are basically eyeing an upcoming $3-$5 billion Eurobond issuance – with the government finally receiving the Senate’s nod – as well as a $3 billion injection from the SDR allocation to provide much-needed firepower to help fuel a new adjustment round for the naira,” Basha said.
