ith Nigeria’s external reserves maintaining a downward trend in recent years, as a result of inadequate oil production and the exit of Foreign Portfolio Investors (FPIs), most analysts who made predictions about the country’s economy at the beginning of the year, said they expected a further decline in the reserves in 2024.

Forecasts

For instance, in its latest report on Nigeria, the International Monetary Fund (IMF) projected that the country’s external reserves, which stood at $32.9 billion at the end of 2023, would drop to $24 billion this year. The IMF stated: “Through 2024–25, the financial account is likely to deteriorate, with no projected issuance of Eurobonds, large Fund and Eurobond repayments of $3.5 billion, and portfolio outflows. “Hence, despite a current account surplus, officially reported reserves are projected to decline to $24 billion in 2024 before increasing again to $38 billion in 2028 as portfolio inflows resume.” Also, analysts at FBNQuest, who attributed the decline in Nigeria’s external reserves last year to the strong demand for foreign exchange by end-users, weak accretion to the reserves from export proceeds (primarily crude oil), and the sharp drop in foreign portfolio inflows, said in January that they expect the reserves to rise slightly to $34 billion by the end of the year. The analysts stated: “Total reserves as at end December 2023 covered 7.7 months of merchandise imports per the balance of payments for the 12 months to June 2023 and 5.7 months when we add imported services. “However, for a more accurate picture, we must adjust the gross reserve figure for the pipeline of delayed external payments and the encumbered portion of the reserves. “We anticipate limited accretion to the external reserve this year due to challenges in raising Nigeria’s crude oil output from 1.3 million barrels per day (mb/d) toward the 1.78 mbd envisaged in the 2024 budget. “Regarding pricing, expected OPEC production cuts may be offset by higher non-OPEC oil output, notably the anticipated rise in US production. This is likely to keep oil prices in equilibrium. “We forecast the gross official reserves at $34.0 billion by the end of 2024, slightly higher than the $32.9 billion it closed in 2023.”

External reserves head north

However, briefing journalists on the outcome of the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) meeting on February 27, the apex bank Governor, Mr. Olayemi Cardoso, stated that regulator’s ongoing forex reforms, as well as an increase in oil production, pushed the external reserves to $34.51 billion as of February 20, 2024. He said: “The recent improvement in the oil sector was due to the combined impact of increase in crude oil production and a relatively high price in Q4’23. Forecasts indicate that the economy will grow in 2024 by 3.38 per cent (CBN), 3.88 per cent (FGN) and 3.00 per cent (IMF). “Gross external reserves stood at $34.51 billion on February 20, 2024, compared with $32.23 billion at end-January 2024. The improvement was driven by reforms in the foreign exchange market and an increase in oil production amongst others.” Cardoso, who disclosed that the MPC “deliberated extensively on various distortions in the foreign exchange market including the activities of speculators, putting upward pressure on the exchange rate with high pass-through to inflation,” stressed that members of the committee were, “convinced that the ongoing reforms in the foreign exchange market will yield the desired outcome in the short to medium term.” According to him, “some of these reforms include: the unification of the foreign exchange market; promotion of a willing buyer willing seller market; removal of all limits on margins for IMTO remittances; introduction of a two-way quote system and the broad reforms in the BDC segment of the market to restore stability, enhance transparency, boost supply, and promote price discovery in the Nigeria Autonomous Foreign Exchange Market (NAFEM).”

Surge in remittances in February

Indeed, last Friday, the CBN announced that there was a surge in foreign exchange inflow into the economy in February 2024. The bank’s Acting Director of Corporate Communications, Mrs. Hakama Sidi Ali, who disclosed this in a statement, attributed the significant increase in fx inflow to substantial growth in remittance payments from Nigerians abroad and heightened interest from Foreign Portfolio Investors (FPIs) in acquiring naira assets. She said that overseas remittances reached $1.3 billion in February 2024, surpassing the previous month’s inflow of $300 million by more than fourfold. The CBN statement noted that the total portfolio flows for 2024 have already reached $2.3 billion, compared to the $3.9 billion recorded for the entire previous years. The apex bank said the trend of higher foreign exchange inflows continued in March 2024, driven by increased investor interest in short-term sovereign debt following adjustments to benchmark interest rates. The statement partly read: “The Central Bank of Nigeria reported a significant increase in foreign exchange inflow into the economy in February 2024, with marked increments in remittance payments by Nigerians overseas and purchases of naira assets by foreign portfolio investors. “The bank’s data indicates that overseas remittances rose to $1.3 billion in February 2024, more than four times the $300 million received in January.

“Foreign investors purchased more than $1 billion of Nigerian assets last month, with total portfolio flows of at least $2.3 billion recorded thus far in 2024 compared to $3.9 billion seen in total for last year. “When people understand the real issues and see a strategy and a plan, things tend to calm down. Our objective today is to ensure that the market has supply, that the market functions, and that investors can come in and go out.” New Telegraph reports that as part of the CBN’s efforts to restore confidence in the country’s economy, the bank partnered the Nigerian Exchange Group (NGX) to hold a dialogue session with international investors on February 29. Responding to questions during the session on the FX backlog and steps being taken to clear it, Cardoso said that the CBN had cleared its FX backlog in all the banks except five and would do so in the next few days. He said: “Basically what we have done with those is we have paid as much as we can to the point where we have cleared the backlog of all the banks save five. All the bank’s genuine and verifiable backlogs have been cleared save five. “We are confident that we will shortly be in a position where the whole issue of forwards would be behind us. I would say in the next few days we should be in a position where the balance of the five would have been put behind us.” “I have tried as much as possible to be consistent on this matter. I don’t make promises I don’t fulfil. The last time I spoke on this matter, I was confident that within one month, we would be more or less out of it and I’m saying again that right now I think in the course of the next few days maybe a week and a half, this should be put behind us.” Also speaking, the Deputy Governor in charge of Economic Policy at the CBN, Muhammad Sani Abdullahi, revealed that the regulator was working with the IMF to establish a comprehensive framework to tackle volatility in the foreign exchange market.

Abdullahi said: “We plan as much as possible and we are working with the IMF on this to provide a framework where we can allow for a bank where there is excess volatility to be able to see if that volatility is due to lack of supply, then the CBN will step in to improve supply not as a price discovery issue but to provide stability in whatsoever segment is being volatile.” He emphasised that the apex bank was committed to ensuring stability in the foreign exchange markets. He said: “We want to ensure as much as possible stability in all segments of the FX market. So, whenever we see volatility, excess volatility, whether from the bank side or the Bureau De Change (BDC) segment, then the CBN will step in not to drive price but to provide that stability.” Goldman Sachs’ prediction Interestingly, in a report released last Thursday, global investment bank, Goldman Sachs, predicted that the naira will appreciate to N1,200 per dollar within the next 12 months. It stated that the naira looked cheap on a Real Effective Exchange Rate (REER) basis in a historical context. According to the bank, Nigeria’ account surplus, which stood at +3.5 per cent of GDP in the third quarter (Q3) of 2023 is expected to increase above +5.0 per cent on the recent FX moves and associated import compression. “We thus see reason for the naira to be undervalued, and we see it appreciating to N1,200 within the next 12 months,” the firm stated.

The investment banking giant, however, stated that Nigeria’s monetary authority had not “tightened policy appropriately to attract the capital inflows required to ease fiscal and external financing constraints.” It noted that although the outcome of the recent MPC meeting and the CBN’s bill auction penultimate week that brought effective interest rates to 27 per cent, was a significant policy shift, the move still did not compare favourably to elsewhere, notably Egypt. Still, it said that given a combination of positive real rates, limited capital inflows, and evidence of a shift to a more orthodox policy set-up, “we think that Nigeria is turning the corner following its recent currency crisis.” “These developments have prompted us to shift to a constructive outlook for the naira, which our FX strategists expect to appreciate to N1,200 vs. the dollar in 12 months. “We think the naira looks cheap on a REER basis in a historical context. Added to this, the current account surplus was +3.5 per cent of GDP in 2023 Q3, and we expect it to increase above +5.0 per cent on the recent FX moves and associated import compression. We thus see the reason for the naira to be undervalued, and we see it appreciating to N1,200 within the next 12 months,” the bank added.

Conclusion

But while the steady accretion to the external reserves in recent days, occasioned by the surge in fx inflow, may indicate that the CBN’s forex reforms are yielding the desired results, thus eventually leading to the appreciation of the naira, the consensus among financial analysts in the country is that the apex bank must introduce measures to ensure that FPI (hot money) does not flee at the first signs of economic uncertainty