Foreign exchange (FX) bank swaps make up over 30% of Nigeria’s external reserves, according to estimates from the global credit rating company Fitch.
The Central Bank of Nigeria’s (CBN) consolidated financial statement for 2022 lists approximately $32 billion in FX forwards, over-the-counter futures, and currency swaps as off-balance sheet commitments. These opaque entries, combined with this disclosure, highlight the continued uncertainty surrounding the nation’s net foreign exchange reserves.
It stated:
- “The net foreign exchange reserve position remains unclear, especially regarding the approximately USD 32 billion worth of ‘FX forwards, OTC futures, and currency swaps’ that were reported as an off-balance sheet “commitment” in the CBN’s most recent consolidated financial statement for 2022.”
- “Fitch estimates that foreign exchange bank swaps account for about 30% of Nigeria’s reserves, though we expect the majority of these to be rolled over.”
Forex Reserve Uncertainty in Nigeria
Fitch stated in its most recent credit outlook for the nation that one major impediment to Nigeria’s sovereign credit profile is the ambiguity surrounding the exact amount and makeup of the country’s foreign exchange reserves.
Fitch believes that the majority of FX bank swaps will be rolled over in spite of these worries, which would offer some brief stability in the management of the reserve.
Additional study findings point to a recent increase in non-resident inflows into Nigeria, which are being driven by more stringent monetary policy measures and a more formalization of FX activity.
The Naira saw a significant 71% decline from June 2023 to mid-March 2024, although this change has resulted in a noteworthy gain at the official FX window.
Fitch noted that even with this rebound, there are still risks to economic stability due to the currency rate’s volatility.
Nigeria’s foreign exchange reserves continue to fall
The data also showed that by the end of April, Nigeria’s gross foreign exchange reserves had dropped from $34.4 billion in mid-March to $32.2 billion.
Fitch stated that in order to support the currency, FX sales to Bureau de Change operators and debt repayments account for a portion of the decline.
Yemi Cardoso, the governor of the CBN, had a similar opinion recently, stating that efforts to protect the naira were not the main cause of the declining reserves, but rather loan repayments and other regular financial commitments.
In the future, Fitch anticipates a consistent current account surplus for 2024–2025—an average of 0.5% of GDP—fueled by remittances and an anticipated moderate rise in oil production.
By the end of 2024, the FX reserves are expected to fall to barely 4.2 months’ worth of current external payments, which is in line with the “B” median.
It stated that:
- “Gross foreign exchange reserves decreased to USD32.2 billion at the end of April from a peak of USD34.4 billion in mid-March, partially due to FX sales to BDCs to support the currency and existing debt repayment.”
- “Fitch projects a reasonably flat current account surplus in 2024–2025, with remittances and oil production contributing 0.5% of GDP on average.We expect FX reserves to shrink to 4.2 months of current external payments by the end of 2024 (‘B’ median 4.2), down from 4.4 months at the end of 2023.”
Remember from TNC’s earlier report that Bamidele A.G. Amoo, a member of the Monetary Policy Committee (MPC) of the CBN, stated that foreign exchange swap transactions were primarily to blame for the decline in Nigeria’s foreign exchange (FX) reserves.
Lydia Shehu Jafiya, another MPC member, concurred, stating that “As at March 19, 2024, the external reserves stood at US$32.87 billion compared with US$33.68 billion in the previous month due majorly to foreign exchange swap transactions offset in the review period.”
Furthermore, The News Chronicles reported that Nigeria’s foreign exchange (FX) reserves maintained a one-month dip streak, hitting a new low of $32.12 billion on April 17, 2024.
From $34.45 billion on March 18, 2024, to $2.33 billion in just 31 days, the reserves fell to their lowest point since September 20, 2017, when they were $32.08 billion.
TNC’s additional inspections, however, reveal that the FX reserves are very slowly rising—they increased by $178 million, barely recovering from a more than one-month decline.
