External reserves come up for air above $35bn after 2-months of declines
Stronger crude prices provide boost United Capital analysts say international borrowing plan could strengthen gross reserves in Q3’21
NIGERIA’S EXTERNAL RE SERVES finally found their way above $35 billion as of April 22, 2021 resulting from the positive momentum gained in the world oil market with the dollar inflow registering favourably on the reserves.
After two consecutive months of decline (down 3.3 per cent or $1.2 billion month on month in February 2021 and down 0.8 per cent or $279.4 million in March 2021), gross reserves gave signs of beginning to trot in April, improving northward by 1.1 per cent on a month to date analysis or $398.4 million. But on yearto-date, the reserves appear to remain down by 0.4 per cent or $155.1 million.
Since the beginning of the year, oil prices have continued to show momentum after gaining 7.9 per cent and 18.2 per cent in January and February respectively. For the Nigerian government, actual revenue performance in the first quarter of 2021 is expected to receive a boost from the recovery in oil prices. In the first three months of 2021, oil prices averaged $68 per barrel, well above the 2021 budget benchmark of $40 per barrel. This implies positive inflows into the excess crude account.
A glimmer of hope was seen for the reserves after a surge to $36.1 billion in January following the reopening of the national borders, continuous positive rally in the price of Brent crude in the global market and several efforts by the apex bank to defend the local currency, which has seen immense pressure from increased demand for the dollar over the past months. Although, CBN data also show that Nigeria’s gross reserves recorded a rise by $280 million to $34.82 billion in March 2021, which has been analyzed to cover only 7.6 months of imports of goods on the balance of payment basis for 12 months to September and will cover 5.2 months when imported services are added.
The rebound in external reserves to $35.2 billion from $34.9 billion at the start of March 2021 reflects the impact of the rally in crude oil prices in recent months, with Brent crude gaining 28.5 per cent year to date. As analysts have highlighted, the rally in the crude oil market had not filtered into the market’s external reserves as the market is a futures market. Thus, the improved dollar inflows are beginning to trickle into the reserves.
Analysts at United Capital Research have asserted that the attempt of the federal government to borrow from the international debt market and a sustained positive momentum in oil prices in the market could further strengthen Nigeria’s gross reserves in the third quarter of 2021. Also, the analysts maintain that the apex bank is likely to maintain its reluctant position to make signficant forex market interventions pending the period the external reserves cross the $40 billion mark.
“Going forward, we expect the impact of higher crude prices to continue over the coming months. In addition, we expect this to be further aided by the federal government’s plan to issue Eurobonds as part of its debt programme for 2021. We recall that as part of the 2021 budget, the FG announced plans to borrow N2.1 trillion (estimated at $5.5 billion using the official exchange rate) from the international debt market. While we do not anticipate Eurobond issuance of this magnitude, we expect the FG to attempt raising a similar $3.3 billion it planned to raise last year while funding the rest via multilateral sources. In our opinion, it could further strengthen gross reserves in the third quarter of 2021.
“Lastly, we think this bodes well for the FX market, thus improving FX liquidity conditions. That said, we believe the CBN will remain reluctant in resuming significant interventions in the FX market until the external reserves cross the $40 billion mark,” United Capital analysts concluded.
Meanwhile, a recent effort by the central bank to improve local buffers was the introduction of the “CBN Naira 4 Dollar Scheme” which will be brought to a close by May 8, 2021. It was aimed at reducing the cost of remittance inflow, check the activities of round-tripping and also, provide Nigerians in the diaspora with cheaper and more convenient ways of sending remittances to Nigeria.
Elsewhere, the managing director of the International Monetary Fund (IMF), at its spring meetings held a fortnight ago, jointly with the World Bank, pushed the argument for an increase of quotas of special drawing rights (SDRs) equivalent to about $650 billion as quotas are included in reserves and determine the limit on members’ borrowing from the Fund.
Nigeria’s quota is SDR2.45 billion, which is equivalent to $3.50 billion and the FGN borrowed the maximum permitted 100 per cent of quota from the Fund in April 2020. Now, the focus of the debate is how to allow “voluntary post-allocation channelling” of the new SDRs across the membership as the fund’s managing director hopes to make a formal proposal to the board in June.