FX reserves below 6 months import cover, put CBN’s naira defense at risk – Businessday

dollar to naira

Central Bank of Nigeria (CBN)’s foreign exchange policies and ability to defend the naira face further squeeze as dollar reserves falls to about 4.4 months of import cover, below the international Monetary Fund (IMF) recommended six months, BusinessDay findings reveal.

Data from the CBN show that gross official reserves declined by $700m in May on a 30-day moving average basis to $26.4 billion.

Reserves at end-May provided merchandise import cover of 6.1 months and 4.4 months when services are included, according to FBN Quest.

“The authorities have limited weekly FX sales at the CBN’s rate of N197 per US dollar to about $200m yet are still struggling to contain the depletion in the face of strong, but easing import demand,” FBN Quest analysts led by Gregory Kronsten said in a note to investors.

The CBN estimated in January that its monthly supply of FX for sale had slumped to $1bn.

Nigeria gets almost 95 percent of its FX earnings from sale of crude oil.

The spot price of Bonny Light (Nigeria’s benchmark export grade) has recovered to around $50/b however production has fallen by at least 500,000 b/d.

The average decline in FX reserves had been at a rate of $470 million in the ten months since the one-off bonus of July 2015 when the CBN acquired the FX deposits of $2.5bn of government departments and agencies.

The Nigeria’s Central Bank defends the local currency from the external reserves.

Christine Lagarde, managing director of IMF had early this year emphasized the need for flexibility with monetary policies in order not to deplete the reserves.

Analysts say the rate of depletion of external reserves shows that the current foreign exchange policies of the regulator are not sustainable.

The CBN after the Monetary Policy Committee (MPC) meeting of last month signaled its intention to introduce a flexible foreign exchange regime.

This follows last month’s move by the NNPC to set a new retail price ceiling for petrol of N145/litre which was arrived at by computing a blended FX rate of N285/$ for marketers importing the product.

On the issue of balance of payments (BoP), Yvonne Mhango, Renaissance Capital’s Sub-Saharan Africa (SSA) economist expects at most $7 billion in net financial inflows for Nigeria in 2016, mainly loans, to finance a current account deficit of about $22 billion, by the firm’s estimate.

This means a financing gap of about $15 billion that can be drawn from FX reserves.

Adding outstanding obligations of at least $3 billion implies reserves fall to about $11billion or two-to-three months of import cover by year end (YE) 2016 (vs. $29bn at YE15).

“Depleted FX reserves, low export earnings and financial inflows, and price inelastic imports, put Nigeria at risk of a balance-of-payments crisis in 2017, in our view. The upside risk is a sizeable positive balance in the (volatile) net errors and omissions line that helps finance the current account”, Mhango said in an email note to BusinessDay.

We expect the BoP financing gap to be closed by drawing down FX reserves. However, this will leave Nigeria with FX reserves that are in the low double-digits, which is an extremely vulnerable external position. Particularly if FX policy is unchanged. We think Nigeria is at high risk of a BoP crisis in 2017,” Mhango said.

Nigeria’s economy has been battered by a fall in oil prices.

Growth was negative in the first quarter for the first time since 2004. Conflicting signals from CBN Governor Godwin Emefiele and President Muhammadu Buhari who has opposed a weaker currency in past statements has tempered investor expectations on a new FX policy that might lift growth.

“If the CBN rate is to be limited to “critical transactions”, then logically pressure on reserves from flows should ease. The success of the second window in unlocking additional FX supplies hinges upon the modalities to be announced. We would expect the CBN to err on the side of conservatism’, analysts at FBNQuest said in a report.