Nigeria’s foreign exchange reserves to plummet, CBN expects $1.7bn arrears payment

Central Bank of Nigeria

Nigeria’s foreign exchange reserve will plummet in 2022 as the Central Bank of Nigeria (CBN) plans to clear around $1.7 billion in currency arrears to foreigners and currency futures, the world Bank said.

The World Bank said the country’s reserves had risen to $41.3 billion by the end of 2021, giving it an opportunity to adjust the exchange rate.

In its “Nigeria Development Update (June 2022): The Continuing Urgency of Unusual Business,” the World Bank said, “Boosted by rising oil exports, the allocation of special drawing rights from the International Monetary Fund in August 2021 and a Eurobond issue in September 2021, gross official reserves reached $41.3 billion (7.4 months of imports) at the end of 2021; offering a possibility of adjustment of the exchange rate.

“Nigeria issued additional Eurobonds for $1.25 billion in March 2022. However, gross foreign exchange reserves are expected to decline in 2022 as the CBN is expected to clear foreign exchange backlog for foreigners (estimated at 1 $.7 billion at the end of October) and FX futures. contracts. »

According to the bank, direct investment in Nigeria was weak in 2022 as fluctuations in the country’s exchange rate discouraged investors.

He further said that foreign direct inflows into the country accounted for less than 1% of gross domestic product in 2021 despite rising oil prices which should have boosted portfolio investment in the country. He added that Nigeria’s current account is expected to strengthen in 2022.

The World Bank said the country’s current account has improved in 2021 thanks to its economic recovery from COVID-19 and further improvement is expected in 2022 due to higher oil prices, remittances. funds and non-oil exports.

He said: “In 2021, the current account deficit fell from 3.8% of GDP in 2020 to 0.4% in 2021, driven by an increase in exports resulting from the rebound in oil prices.

“In contrast, imports remained subdued and fell 4% year-on-year. This was partly due to the scarcity of foreign exchange, as the private sector reported shortages of foreign exchange even for “authorized” imports.8 Remittance flows also recovered to pre-pandemic levels in 2021.

“In 2022, rising oil prices are expected to push the current account into a surplus for the first time since 2018, amounting to 2.8% of GDP. Direct investment remained weak in 2022 as exchange rate management issues deterred investors. Net foreign direct investment inflows in 2021 remained below 1% of GDP, despite rising oil prices which historically led to increased portfolio investment flows into the country.

The Washington-based bank said that while the CBN was making progress in harmonizing the two major exchange rates, its reform remained incomplete as the persistence of multiple rates continued to discourage private investment.

He added that rising interest rates in the United States and other advanced economies would likely cause a net outflow of portfolio investment from the country as investors shift their investments to certain environments.

He further said the pre-election is likely to add to portfolio investor hesitancy, keeping net inflows low.

According to him, clarity in exchange rate policy and transparency in the management of the Nigerian government are necessary to attract greater capital inflows, including FDI into the country.

He added that the CBN continued to provide foreign exchange at at least four windows, sometimes at varying rates: the I&E window; secondary market intervention retail window; the counter for small and medium-sized enterprises; and the window of the invisible.

Also read: Nigeria’s foreign exchange reserves are now below $39 billion – CBN

Commenting on the development, a professor of economics and public policy at Uyo University, Professor Akpan Ekpo, said, “The backlog is because we don’t have the FX. Demand for FX exceeds supply, remember FX is not our money, our naira is not convertible.

“We have to sell oil to get foreign currency, we have to get oil companies to pay foreign currency. Where there is a shortage of supply, you cannot meet the demand. The only way for us is to have a strong and dynamic manufacturing sector and to export non-oil goods to earn foreign exchange for the economy.

“Now that it’s political season, the FX problem is going to get worse because people are buying FX to keep for political campaigns. If we don’t pay, we have to reschedule, and I hope we don’t. we won’t get to the point where we get to a monetary crisis which is a point where we can’t honor our letters of credit.

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