By Marcel Okeke

The deafening silence of the Central Bank of Nigeria (CBN) since JP Morgan’s very shocking revelation a few weeks ago that Nigeria’s foreign exchange (FX) reserves stood at about US$3 billion as at end-December 2022 is really worrisome. According to the

American financial services firm, a combination of foreign exchange forwards, securities lending, currency swaps, and outstanding contracts has weakened Nigeria’s net external reserves to an all-time low of US$3.7 billion as of the end of last year. Although data from the CBN had shown that Nigeria’s external reserves stood at US$33.88 billion as of August 10, 2023, down from US$37.08 billion at the end of last year, JP Morgan says the country’s “net forex reserves are significantly lower than previously estimated.”

Disturbingly, too, the Economic Intelligence Unit (EIU)—an arm of The Economist of London—also reported that “more than 40 per cent of foreign reserves held by the Central Bank of Nigeria (CBN), about US$34bn in early August, are encumbered assets, according to the CBN’s audited financial statement for 2022.” The report was published in early August 2023 and is the CBN’s first since 2015. “Using the equivalent amount of securities in its foreign-exchange reserves as collateral, as of end-2022 the CBN had borrowed US$7.5bn from overseas banks and owed more than US$7bn as a counterparty in foreign-exchange forwards. In total, US$14.7bn of the CBN’s foreign reserves are claimed in some form,” the EIU said.

The EIU report said “Nigeria’s foreign-exchange reserves, officially reported as equivalent to 7.8 months of imports, are an important cushion against external payment risks. Based on imports for the first quarter of 2023, the “actual” stock of foreign reserves is equivalent to only 4.5 months of imports.” All these tally with JP Morgan’s position, where it showed that huge portions of Nigeria’s foreign Exchange (FX) reserves were dangerously encumbered. Specifically, in arriving at its figures, JP Morgan broke down Nigeria’s purported FX reserves stock thus: “FX forwards ($6.84 billion), securities lending ($5.5 billion) and currency swaps ($21.3 billion); and estimated currency swaps by backing out FX forwards and outstanding OTC Futures balances from an overall aggregate published in the financial accounts.”

On its part, Moody’s Investors Service, a global financial rating agency, said in its note published on August 18, 2023 that: “The CBN reports suggest that some of its loans were used to bolster Nigeria’s (Caa1 stable) foreign exchange reserves. Should this be the case, and given the liabilities’ short tenure, our assessment of Nigeria’s foreign-exchange reserve adequacy would weaken.” The CBN’s audited report showed that it owes JP Morgan US$7 billion and Goldman Sachs US$500 million, while US$6.3 billion is owed as foreign currency forwards. Moody’s noted that assuming that the CBN borrowed the whole US$14.2 billion to bolster foreign reserves, “we would roughly halve the 2022 year-end gross reserves of US$30.3 billion to US$16.1 billion”.

“Similarly, our External Vulnerability Indicator (EVI), which measures short-term external debt plus maturing long-term external debt and non-resident long-term deposits relative to official foreign reserves, would worsen to up to 200 percent from its 2023 forecast level of 100 percent,” Moody’s said.

These damning reports are neither coincidences nor fictions, when juxtaposed against the recent emergency US$3 billion ‘loan’ secured on behalf of the CBN by the Nigerian National Petroleum Company Limited (NNPCL). This development is made curious by the fact that the ‘privatized’ NNPCL has suddenly forayed into financial (re)engineering, to be the entity ‘borrowing’ from the African Export-Import Bank (Afrximbank) to strengthen the CBN’s capacity to manage Nigeria’s foreign exchange market. This queer arrangement, in reality, necessarily shows that the apex bank (already highly geared) had run short of forex; and remained incapable of sourcing any by itself. But the JP Morgan report noted that Nigeria’s low net FX reserves mean continued FX market pressures.

“Nigeria’s foreign 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. The lack of clarity on Nigeria’s external reserves worsened after the apex bank’s audited reports revealed it has a standing US$14 billion loan obligation to entities including to American investment bankers, JP Morgan and Goldman Sachs.

Apparently overwhelmed by the unfolding scenarios, the CBN had in recent times practically backpedalled and recanted some of its pronouncements and policies. It has started ‘meddling’ in the forex market, manipulating the system to arrive at daily exchange rate of the Naira against the dollar. This is as against the perfect market condition where market forces (demand and supply) were supposed to determine the exchange rates. ‘Secretly’ as it were, the apex bank has jettisoned the full floatation of the national currency.

It is recalling a large number Bureaux de Change (BDCs) which the apex bank barred from access to FX about two years ago. In doing this, the CBN is also trying to control the parallel market operators (BDCs) by compelling them to be making daily, weekly, monthly and annual reports to the relevant unit(s) of the Bank.

The CBN is also introducing a Price Verification System (PVS), under which it demands that: “All applications for Form M shall be accompanied by a valid price verification report generated from the price verification portal. “For the avoidance of doubt, by this circular, the price verification report has become a mandatory trade document precedent to the completion of a Form M,” the apex bank said. Form M is a declaration of intention to import physical goods into the country; and it is mandatory irrespective of the value and whether payment is involved or not.

However, even with all these ‘panic measures’ that clearly negate full Naira floatation, as earlier announced, the apex bank is yet to effectively commence addressing the acute dollar scarcity from the roots. Licensing of more petrol importers by the Federal Government, for instance, is tantamount to more pressure on the forex market, as these fuel importers source the dollar for their business. Crude oil production/export, unfortunately, is declining rather than rising, as shown by OPEC data for June and July, 2023. At present, Nigeria is producing roughly one million barrels per day as against its OPEC quota of 1.8 million barrels per day. All these constrain FX inflow.

JP Morgan says, to change the narrative, Nigeria would need foreign direct and other portfolio investments to attract FX inflows. “Thus, in our view, continuing on the reform path would be imperative to allay concerns on the external side,” JP Morgan said. With import cover being closer to 4.5 months (as against CBN’s bloated figures), the risk of convertibility restrictions being imposed to control the exchange rate is consequently higher. A more managed exchange-rate regime would in any case be more unstable, and prone to regular devaluations.

This is what is already playing out; and this is why the current secrecy that shrouds CBN’s ‘reforms’ must give way to full transparency in line with a fully liberalized market. The CBN’s reforms need the buy-in of credible local and foreign investors as well as all economic players. The extant lack of transparency warrants and underlines the question: how much is Nigeria’s external reserve? Okeke, an economist, sustainability expert and consultant on business strategy lives in Lagos. He can be reached at: obioraokeke2000@yahoo.com

The deafening silence of the Central Bank of Nigeria (CBN) since JP Morgan’s very shocking revelation a few weeks ago that Nigeria’s foreign exchange (FX) reserves stood at about US$3 billion as at end-December 2022 is really worrisome. According to the American financial services firm, a combination of foreign exchange forwards, securities lending, currency swaps, and outstanding contracts has weakened Nigeria’s net external reserves to an all-time low of US$3.7 billion as of the end of last year. Although data from the CBN had shown that Nigeria’s external reserves stood at US$33.88 billion as of August 10, 2023, down from US$37.08 billion at the end of last year, JP Morgan says the country’s “net forex reserves are significantly lower than previously estimated.”

Disturbingly, too, the Economic Intelligence Unit (EIU)—an arm of The Economist of London—also reported that “more than 40 per cent of foreign reserves held by the Central Bank of Nigeria (CBN), about US$34bn in early August, are encumbered assets, according to the CBN’s audited financial statement for 2022.” The report was published in early August 2023 and is the CBN’s first since 2015. “Using the equivalent amount of securities in its foreign-exchange reserves as collateral, as of end-2022 the CBN had borrowed US$7.5bn from overseas banks and owed more than US$7bn as a counterparty in foreign-exchange forwards. In total, US$14.7bn of the CBN’s foreign reserves are claimed in some form,” the EIU said.

The EIU report said “Nigeria’s foreign-exchange reserves, officially reported as equivalent to 7.8 months of imports, are an important cushion against external payment risks. Based on imports for the first quarter of 2023, the “actual” stock of foreign reserves is equivalent to only 4.5 months of imports.” All these tally with JP Morgan’s position, where it showed that huge portions of Nigeria’s foreign Exchange (FX) reserves were dangerously encumbered. Specifically, in arriving at its figures, JP Morgan broke down Nigeria’s purported FX reserves stock thus: “FX forwards ($6.84 billion), securities lending ($5.5 billion) and currency swaps ($21.3 billion); and estimated currency swaps by backing out FX forwards and outstanding OTC Futures balances from an overall aggregate published in the financial accounts.”

On its part, Moody’s Investors Service, a global financial rating agency, said in its note published on August 18, 2023 that: “The CBN reports suggest that some of its loans were used to bolster Nigeria’s (Caa1 stable) foreign exchange reserves. Should this be the case, and given the liabilities’ short tenure, our assessment of Nigeria’s foreign-exchange reserve adequacy would weaken.” The CBN’s audited report showed that it owes JP Morgan US$7 billion and Goldman Sachs US$500 million, while US$6.3 billion is owed as foreign currency forwards. Moody’s noted that assuming that the CBN borrowed the whole US$14.2 billion to bolster foreign reserves, “we would roughly halve the 2022 year-end gross reserves of US$30.3 billion to US$16.1 billion”.

“Similarly, our External Vulnerability Indicator (EVI), which measures short-term external debt plus maturing long-term external debt and non-resident long-term deposits relative to official foreign reserves, would worsen to up to 200 percent from its 2023 forecast level of 100 percent,” Moody’s said.

These damning reports are neither coincidences nor fictions, when juxtaposed against the recent emergency US$3 billion ‘loan’ secured on behalf of the CBN by the Nigerian National Petroleum Company Limited (NNPCL). This development is made curious by the fact that the ‘privatized’ NNPCL has suddenly forayed into financial (re)engineering, to be the entity ‘borrowing’ from the African Export-Import Bank (Afrximbank) to strengthen the CBN’s capacity to manage Nigeria’s foreign exchange market. This queer arrangement, in reality, necessarily shows that the apex bank (already highly geared) had run short of forex; and remained incapable of sourcing any by itself. But the JP Morgan report noted that Nigeria’s low net FX reserves mean continued FX market pressures.

“Nigeria’s foreign 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. The lack of clarity on Nigeria’s external reserves worsened after the apex bank’s audited reports revealed it has a standing US$14 billion loan obligation to entities including to American investment bankers, JP Morgan and Goldman Sachs.

Apparently overwhelmed by the unfolding scenarios, the CBN had in recent times practically backpedalled and recanted some of its pronouncements and policies. It has started ‘meddling’ in the forex market, manipulating the system to arrive at daily exchange rate of the Naira against the dollar. This is as against the perfect market condition where market forces (demand and supply) were supposed to determine the exchange rates. ‘Secretly’ as it were, the apex bank has jettisoned the full floatation of the national currency.

It is recalling a large number Bureaux de Change (BDCs) which the apex bank barred from access to FX about two years ago. In doing this, the CBN is also trying to control the parallel market operators (BDCs) by compelling them to be making daily, weekly, monthly and annual reports to the relevant unit(s) of the Bank.

The CBN is also introducing a Price Verification System (PVS), under which it demands that: “All applications for Form M shall be accompanied by a valid price verification report generated from the price verification portal. “For the avoidance of doubt, by this circular, the price verification report has become a mandatory trade document precedent to the completion of a Form M,” the apex bank said. Form M is a declaration of intention to import physical goods into the country; and it is mandatory irrespective of the value and whether payment is involved or not.

However, even with all these ‘panic measures’ that clearly negate full Naira floatation, as earlier announced, the apex bank is yet to effectively commence addressing the acute dollar scarcity from the roots. Licensing of more petrol importers by the Federal Government, for instance, is tantamount to more pressure on the forex market, as these fuel importers source the dollar for their business. Crude oil production/export, unfortunately, is declining rather than rising, as shown by OPEC data for June and July, 2023. At present, Nigeria is producing roughly one million barrels per day as against its OPEC quota of 1.8 million barrels per day. All these constrain FX inflow.

JP Morgan says, to change the narrative, Nigeria would need foreign direct and other portfolio investments to attract FX inflows. “Thus, in our view, continuing on the reform path would be imperative to allay concerns on the external side,” JP Morgan said. With import cover being closer to 4.5 months (as against CBN’s bloated figures), the risk of convertibility restrictions being imposed to control the exchange rate is consequently higher. A more managed exchange-rate regime would in any case be more unstable, and prone to regular devaluations.

This is what is already playing out; and this is why the current secrecy that shrouds CBN’s ‘reforms’ must give way to full transparency in line with a fully liberalized market. The CBN’s reforms need the buy-in of credible local and foreign investors as well as all economic players. The extant lack of transparency warrants and underlines the question: how much is Nigeria’s external reserve? Okeke, an economist, sustainability expert and consultant on business strategy lives in Lagos. He can be reached at: obioraokeke2000@yahoo.com