Here are 3 ways Nigeria can shore up FX reserves

… N4.5trn OMO bills to be redeemed Q1 … Coronation says FDI important to address GDP growth

Nigeria is seen to have a good chance of raising enough money to shore up its reserves in 2020, sufficient to prevent a devaluation of the currency this year, according to Coronation Merchant Bank Limited.

Guy Czartoryski, head of research, Coronation Asset Management, said with proceeds from the Nigerian National Petroleum Corporation offshore, the proposed Eurobond issuance, and Open Markets Operations (OMO) bills, the country can realise $6 billion in the early part of this year.

Czartoryski said this in a paper titled ‘Re-risking the Financial System’ presented at a breakfast session organised by Coronation Merchant Bank in Lagos.

Stakeholders at breakfast session unanimously agreed that the Lekki Free Trade Zone, the recent introduction of Long-dated FX Futures by the CBN and the FMDQ and bilateral loans could spur Foreign Direct Investment (FDI) even as the country is bedevilled by a myriad of challenges undermining economic growth.

Banjo Adegbohungbe, acting managing director, Coronation Merchant Bank, said several factories would spring up at the Free Zone area, and the landscape in there would be fully transformed.

“The amount of jobs and the multiplier effect that we will have on the economy will be quite significant. Some of them might even earn foreign exchange for the country. Don’t forget that some of these challenges are long term and will need solutions that have long-term perspective,” Adegbohungbe said.

With increasing exposure to external vulnerabilities, Nigeria is at risk of a higher current account deficit and declining reserves which have remained highly defenceless to capital flow reversals.

For an oil-dependent nation like Nigeria, plunging oil price fuelled by the Coronavirus outbreak could mean additional shock for Africa’s most populous nation as the decline in global oil demand and the consequent fall in prices may throw the country’s 2020 revenue projection in disarray.

The increased dollar sales by the CBN to defend the naira in the face of high dollar demand by foreign portfolio investors exiting the nation’s fixed income market has been the key culprit responsible for the continued decline in the country’s external reserves.

The reserve which has maintained downward trend in the last eight months worsened last week by a 49 percent decline from $37.73 billion the week earlier to N37.23 billion as of 13th February 2020, data by the CBN show.

The management of FX reserves is linked to the CBN’S setting of market interest rates. Currently, Nigeria has a dual interest rate system, with the CBN’S OMO bills available only to banks’ proprietary books and to foreign portfolio investment.

If the CBN cannot sell sufficient OMO bills to foreigners in early 2020 then this could, in analysts’ view, present challenges to its FX reserves management and distrust the current N362.50/US$ exchange rate.

Iyobosa Sorae, head, trading & FI, Coronation Merchant Bank Limited, said to reach the goal of attaining FDI, there are certain things that should be put in place, which she said the CBN is already doing but remains the fiscal side.

“If you look at the tax reform that was recently announced, if you look at certain incentives even from the CBN towards the real sector of the economy, if you look at the Lekki Free Trade Zone, those are the things that are needed to ensure that in the long term we begin to get these FDIS and before those things begin to materialise, we have to survive as a country that is import dependent,” Sorae said.