In a recent revelation that has sent shockwaves through Nigeria’s financial landscape, JP Morgan, a prominent American multinational financial services firm, has estimated that Nigeria’s net foreign exchange (FX) reserves dwindled to $3.7 billion by the end of 2022. This startling figure, significantly lower than previous estimates, has been attributed to larger-than-expected currency swaps and borrowing against existing reserves, as stated in JP Morgan’s latest report titled ‘Nigeria: Reform pause rather than fatigue’.
The Role of FX Reserves and Unveiled Realities:
Gross FX reserves, which encompass the total foreign currency holdings of the government, play a pivotal role in safeguarding the value of the naira and covering the country’s substantial import bills. However, net FX reserves subtract foreign currency liabilities from gross reserves, providing a more accurate picture of available resources.
JP Morgan’s report highlighted that Nigeria’s net FX reserves of $3.7 billion at the close of 2022 were a significant decline from the $14.0 billion reported at the end of 2021. The firm outlined assumptions that guided their estimation process, including the addition of $5.0 billion in IMF Special Drawing Rights (SDR) to external reserves and adjustments for key FX liability lines, such as FX forwards, securities lending, and currency swaps.
Despite the low net FX reserves potentially intensifying FX market pressures, JP Morgan acknowledged that the Central Bank of Nigeria (CBN) still possesses the capability to source FX at commercial and semi-commercial rates. The report emphasized the continued profitability of currency swap arrangements between the CBN and domestic commercial banks, although in smaller sizes and potentially more punitive rates.
Challenges and Medium-Term Relief:
The report also touched upon Nigeria’s inflation trajectory, predicting that headline inflation will remain elevated due to higher food costs influenced by fiscal and FX reforms. JP Morgan stated that July’s inflation data reflects the initial impact of these reforms and anticipates that headline inflation could rise towards 28% year-on-year by the end of the year.
In terms of potential relief, JP Morgan noted President Bola Tinubu’s decision to maintain a cap on petrol prices. Nevertheless, the report forecasted that the exchange rate would continue on a depreciating path, exerting additional pressure on prices.
Amidst these unveiled realities, Nigeria’s economic landscape stands at a critical juncture, grappling with the complexities of managing FX reserves, inflation, and market dynamics. The insights provided by JP Morgan’s report shed light on the challenges and opportunities that lie ahead, as Nigeria navigates its path to economic stability and growth.