As of June 6, 2024, Nigeria’s foreign exchange (FX) reserve stood at $32.80bn. This is according to data made available on the Central Bank of Nigeria, CBN’s website following a consistent pattern of upward trajectory witnessed over the past six days, indicating a recovery process for the economy’s external reserve.
According to reports, the country’s foreign reserve grew slowly but steadily within the past six days by $110m from the previous record which stood at $32.69bn as of May 31.
Recall that the foreign reserve was recently reported to have suffered a significant decline of $1.8bn for 10-weeks. In spite of the prolonged dip, the following trajectory which maintained its balance over the past six days indicated a laudable increase from $32.74bn on June 3 to $32.77bn on June 4 then $32.79bn on June 5 before the current value.
While the sustained increase in the foreign reserve is a welcome development for the Nigerian economy, which has faced challenges in recent times, prior reports indicate that the reserve had grossly declined by $1.8bn between March 18 and May 29, 2024.
The consequence of the decline was widespread anxiety, especially by government officials and relevant authorities over the country’s ability to meet its financial obligations which are considered significantly beyond its revenue in recent time.
The recent increase however suggests that the economy is on the path to recovery especially that the foreign reserve is a critical component of a country’s economic health and serves as a buffer against economic shocks while providing means to settle international obligations.
It is hoped that if this continues for a longer time, the growth of the country’s foreign reserve will exceed mere expectations, bolstering investor confidence and supporting overall economic growth in Nigeria.
Moreover, the naira had in the latter part of March 2024, reportedly rebounded against the United States dollar at the official and parallel markets, with the local currency recording a significant gain against the greenback at the black market.
This came after the Central Bank of Nigeria announced the final settlements of all valid foreign exchange backlogs, fulfilling a key pledge of the apex bank governor, Mr. Olayemi Cardoso, to process an inherited backlog of $7bn in claims.
In another story, the international credit rating agency, Fitch Ratings, recently projected that the Nigerian naira will end the year at 1,450 to the United States of American dollar.
It is no news that the naira’s worth against the US dollar has been dwindling for the longest time. This, it is speculated to have spurred the Director, Sovereigns, at Fitch Ratings, Gaimin Nonyane’s statement during a post-sovereign rating webinar which held last Tuesday.
The post-rating webinar had focused on Nigeria and Egypt, following a revised outlook on Nigeria’s Long-Term Foreign-Currency Issuer Default Rating to Positive from Stable earlier in May.
During Fitch Ratings revision, it also affirmed the IDR at ‘B-’, on the back of reforms in the foreign exchange market, oil industry and monetary policy over the past one year which saw the Naira struggle since its floating in June 2023.
According to Nonyane, “The Naira is still finding its feet. It is still in price discovery mode. So we would expect a lot of volatility in the near term. However, as I just mentioned, there is the expectation of multilateral donor funding coming in Q3 this year in addition to improved oil receipts. So that should help to reduce volatility somewhat by Q3 this year.
“We project that will average about 1200/dollar this year and end the year round 1450/dollar. And in terms of next year, we see a gradual depreciation, but it also depends largely on the foreign exchange reforms momentum. So, this is our baseline scenario on the basis that the momentum continues at the current pace.
“Currently, we see a path to a sustainable recovery in CBN foreign exchange position. And sustained current account surpluses. Currently, the current account surplus is low, below one per cent of the GDP, although they are experiencing some surpluses, it is still not significant in addition to that, if we see a sustained reduction in inflation and greater stability in the foreign exchange markets, and one key factor is the tax revenue. We need to see stronger mobilisation of domestic non-oil revenue. So all of these combined collectively, it’s not one or the other, which could potentially lead to an upgrade.
“Low tax revenue base has contributed to the government’s very high interest-to-revenue ratio which currently stands at 38 per cent and that is quite high. This is about four times more of the B rating median and forms a key rating consideration.”
Projecting recovery in the oil sector, Nonyane said, “However, we do expect a recovery in the oil sector to support the current account over the short term. We also expect the oil refining capacity to increase over the short term as the Dangote plant ramps up capacity. We expect the PMS to come on stream later this year or early next year and this would help to reduce transport costs and lower refined oil imports which should help to ease foreign exchange demands.”
Nonyane also lamented the mighty fall of the foreign exchange reserves while making some projections. The Fitch Ratings boss said, “in terms of the outlook, we project foreign exchange reserves to rise modestly by year-end and this would be as a result of a recovery in oil receipts, multilateral funding and potentially commercial borrowing. This would equate to about 4.2 months of current external payments which is still in line with our B-medium but following the CBN’s recent publication of its financial statement, we still estimate that more than 30 per cent of the gross reserves are from bank swaps, this highlights an external risk. Although we do expect the majority of the swaps to continue to be rolled over, providing space to navigate some challenges in external debt servicing.
“External debt servicing is expected to rise by about $4.8bn in 2024 and a further $5.2bn in 2025 and this includes amortisation and the $1.1bn Eurobond which would be due in November 2025. So sustaining the foreign exchange momentum is key.”
