30% of Nigeria's external reserves are FX bank swaps – Fitch

The global credit ratings agency, Fitch, has estimated that approximately 30% of Nigeria’s external reserves are constituted by foreign exchange (FX) bank swaps.

This disclosure underscores ongoing uncertainties regarding the country’s net FX reserves, exacerbated by opaque entries amounting to nearly $32 billion in FX forwards, over-the-counter futures, and currency swaps listed as off-balance sheet commitments in the Central Bank of Nigeria’s (CBN) consolidated financial statement for 2022.

It said:

“Uncertainty continues over the net FX reserve position, with a particular lack of clarity on near USD32 billion of ‘FX forwards, OTC futures, and currency swaps’ recorded as an off-balance sheet “commitment” in CBN’s last consolidated financial statement for 2022.

“Fitch estimates around 30% of Nigeria’s reserves are made up of FX bank swaps, although we expect most of these to continue to be rolled over.”

Uncertainty in Nigeria’s FX Reserves

In its latest credit outlook for the country, Fitch noted that the lack of clarity over the precise size and composition of Nigeria’s FX reserves remains a significant constraint on the nation’s sovereign credit profile.

Despite these concerns, Fitch anticipates that most of the FX bank swaps will continue to be rolled over, which could provide some temporary stability in the reserves management.

Further insights from the report indicate a recent upswing in non-resident inflows into Nigeria, driven by a greater formalization of FX activities and tighter monetary policy measures.

This shift has sparked a notable appreciation of the Naira at the official FX window, following a substantial 71% depreciation from June 2023 through mid-March 2024.

Despite this recovery, Fitch stated that the exchange rate remains volatile and continues to pose risks to economic stability.

More decline in Nigeria’s FX Reserves

The report also noted that the Nigeria’s gross FX reserves have seen a decline, falling from $34.4 billion in mid-March to $32.2 billion by the end of April.

Fitch noted that the reduction partly reflects debt repayments and FX sales to Bureau de Change operators to bolster the currency.

This sentiment was also shared by the CBN governor, Yemi Cardoso, who recently said that that the decreasing reserves were primarily due to debt repayments and other standard financial obligations, rather than efforts to defend the naira.

Looking ahead, Fitch projects a steady current account surplus, averaging 0.5% of Gross Domestic Product (GDP) for 2024-2025, supported by an expected modest increase in oil production and remittances.

However, the FX reserves are projected to diminish to cover just 4.2 months of current external payments by the end of 2024, aligning with the ‘B’ median.

It noted:

“Gross FX reserves fell to USD32.2 billion at end-April, from a peak of USD34.4 billion in mid-March, partly reflecting repayment of existing debt obligations, and FX sales to BDCs to support the currency.

“Fitch projects a broadly flat current account surplus, averaging 0.5% of GDP in 2024-2025, supported by a modest rise in oil production and remittances.

“We forecast FX reserves to fall to 4.2 months of current external payments at end-2024 (‘B’ median 4.2), from 4.4 months at end-2023.”

What You Should Know

Nairametrics earlier reported that a member of the Monetary Policy Committee (MPC) of the CBN, Bamidele A.G. Amoo, said that the decline in Nigeria’s foreign exchange (FX) reserves was mainly due to foreign exchange swap transactions.

This view was also supported by another MPC member, Lydia Shehu Jafiya, who stated 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.”

Nairametrics also reported that Nigeria’s foreign exchange (FX) reserves maintained a one-month dip streak, reaching a new low of $32.12 billion on April 17, 2024. The reserves dropped by $2.33 billion in 31 days, from $34.45 billion on March 18, 2024, marking the lowest level since September 20, 2017, when they were $32.08 billion.

However, further checks by Nairametrics show that the FX reserves are on a slow rise, increasing by $178 million in a marginal recovery from over one month dip.