CBN to JP Morgan: FX reserves flow, change from time to time

Central Bank of Nigeria (CBN) has faulted the bank’s financial accounts estimation published by JP Morgan, questioning its intention.

Hassan Mahmud, the director of the Monetary Policy Department of CBN, clarified this during his appearance on the Money Line television programme.

The American multinational financial services, JP Morgan, noted that factors including foreign exchange forwards, securities lending, currency swaps, and outstanding contracts have weakened Nigeria’s net external reserves to an all-time low of $3.7 billion as of the end of last year.

The firm stated that Nigeria’s net FX reserves were significantly lower than previously estimated.

“FX forwards ($6.84 billion), securities lending ($5.5 billion) and currency swaps ($21.3 billion); and estimating currency swaps by backing out FX forwards and outstanding OTC Futures balances from an overall aggregate published in the financial accounts.

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“Nigeria’s exchange rate market remains fragmented. Since the adjustment of USD/NGN at the Investors and Exporters window a few weeks ago, interbank FX liquidity has not improved as much as anticipated, partly due to the re-introduction of de-facto controls limiting local trades and loose monetary policy conditions,” JP Morgan said.

However, Mahmud stressed that the central bank has tried to be transparent as much as possible, adding that reserves, like any account balance, are a flow that changes at any particular time.

“We read the JP Morgan numbers in-house and didn’t panic. That’s not the first time we see people and institutions reeling out numbers; they must have their intentions to do that, whether to rouse market sentiments or mislead the public.

“But, as much as possible, the central bank has tried to be transparent. What I will say about those numbers is that it is funny that number one, reserves, like any account balance, is a flow; some changes go within it at any particular time.

“Two, even if you have outstanding liabilities, you don’t mark the exceptional liabilities to market on a day and say this is your net balance.

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“I can have $20 million in my account, and I owe someone maybe $13 million that is supposed to be paid in 2027; you can’t come in 2023 and say if I remove that $13 million, your money is $7 million or you are having $7 million.

“Now, I am not having $7 million; I am having $20 million. Because before I took a facility of $13 million, I know I will get $17 million in the next three years to pay you back.”

“But for you to come and tell me that no, your balance is $7 million, and you can’t pay back in three years, it’s just putting it out of context.”

Mahmud, who explained that the liabilities encumbrances to the reserves were expected, said that the CBN built the resources to defend the naira regarding its value to other currencies, and close to 80 per cent of the reserves are CBN’s funds.

He further explained that when the federal government or the oil export receipts come to Nigeria, they come through the central bank, which is monetised to naira for the government to spend in implementing its budget.

“So, that dollar component sits with the central bank, and the purpose of the dollar component, one, is to build the confidence of the international community in the capability of the central bank to meet its trade commitment, and so you will see measurements around what months of imports either goods and services or goods only can your reserves cover?

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“That gives some confidence to foreign investors trading with Nigerian investors regarding import and export. Two, if, for example, we have a float-managed exchange rate regime – if the value of your currency is significantly depreciating or appreciating or whatever direction it is going – the central bank has the firepower to intervene in the market such that you bring the price to your expected or optimal equilibrium rate.

“So, that is what the reserve is meant for – the reserve is not meant for just trading – if there are also shortfalls in the build-up of those reserves, you can take a swap or other engagements that are legally allowed by the CBN Act over the short period,” he said.