Data shows CBN not defending naira with FX reserves

Data showing the Central Bank of Nigeria’s (CBN) scant interventions in the foreign exchange market prove that it is not defending the naira with its foreign reserves.

The central bank has only sold $581 million in the official market, otherwise known as the Nigerian Autonomous Foreign Exchange Market (NAFEM), this year, according to data from FMDQ Securities Exchange, which tracks trading activity.

That leaves the CBN’s sales accounting for only 3.2 percent of the total market turnover of $17.9 billion in the same period.

The apex bank was even a rare buyer of dollars from the banks on two occasions within the period. One was a $50 million transaction on March 28 and the other a $30 million deal the day before on March 27, bringing it to a total of $80 million.

These numbers indicate that the dollar supply that has greased the market and changed the fortunes of a currency that has gone from the world’s worst performer to the best in two months is being driven by supply from autonomous sources rather than the CBN’s supply.

The apex bank has even benefitted from the supply, buying $80 million from the market in March, which brings its net sales to the market to only half a billion dollars.

Investors say the central bank’s policies, from higher market interest rates to the clearance of the outstanding FX forwards backlog, have restored confidence in a once broken market, leading to increased dollar inflows and little need for CBN’s supply.

The last one of the central bank’s seven interventions in the official market happened on the 21st of March when it sold $54 million, contributing slightly above 10 percent of the total market turnover of $523.74 million on the day.

When the apex bank’s paltry $60 million sales to Bureau de Change operators this year (since lifting a three-year-old ban on dollar sales to the informal traders) is factored in alongside the $581 million sold at the official market, the total CBN interventions come to $641 million.

In comparison, Nigeria’s external reserves shed $2.16 billion in the past month, falling to a seven-year low of $32.29 billion on April 15, 2024 from $34.45 billion on March 18, 2024, according to CBN data.

That figure is however more than double of the combined interventions of the CBN in the market, making it improbable that the shortfall in the external reserves has gone into the naira defence.

“We may not know what caused the drop in FX reserves but data from NAFEM shows the reserve drop did not flow into FX sale nor was it used to defend the currency,” a market source familiar with the matter said.

“The CBN pays debt repayment and coupons from the reserves, so it has other obligations. There is no data evidencing this so-called naira defence with reserves,” another source said.

Olayemi Cardoso, the CBN governor, provided some clarity on the decline in reserves, linking it to some debt repayments rather than defending the naira.

“What you see with respect to the shifts in our reserves is the shift you will find in any country’s reserve situation where for example debts are due and certain payments need to be made and they are made because that is also part of keeping your credibility intact,” Cardoso said during the IMF/World Bank spring meetings Wednesday.

Nigeria faces significant external debt service requirements, including payments on Eurobonds and other international financial obligations.

The repayments of these debts require substantial amounts of foreign currency, further draining the reserves.

Nigeria spent about half of its dollar earnings to service external debts between January and October 2023.

According to data from the CBN, out of the $6.11 billion in total outflows made during this period, $3.07 billion was spent on servicing external debt.

Isaac Marshall, a senior investment analyst at TLG Capital, said the central bank is “defending the naira simply by honouring the backlog of USD conversions that market participants have been hoping to complete for years.

“The result is that the enormous queue of USD/NGN conversions at the central bank has finally ended and the currency is nearly synchronised across the parallel and official markets,” Marshall said in a LinkedIn post.

“Using reserves to honour legal/proper transactions is the raison d’etre of a Central bank’s FX reserve. In this light, the depletion of reserves over the past month is a positive for both the currency and the Nigerian macro.”

The naira weakened to 1,154 per US dollar in Thursday’s trading from 1,072 the previous day, FMDQ data showed.

On the streets, a dollar exchanged for N1,010, according to data collated from multiple traders.

The wide gap between the official and unofficial rates have narrowed, with both rates neck and neck for more than two months since the CBN loosened its grip on the official rate, instilling some confidence in the market.

Cardoso, during his briefing at the World Bank and IMF spring meetings, assured of the central bank’s commitment to a market-driven approach under his watch.

“What we are encouraging for the market is willing-buyer/willing-seller price discovery. Ultimately, I perceive a future where the central bank will really not need to intervene except in very very unusual circumstances,” he said.