Temitayo Jaiyeola and Sami Olatunji
The Federal Government is expected to make up to $17bn if it sells down its stake in most joint-ventures oil and assets, JP Morgan has stated.
The United States bank’s projection came against the backdrop of the government’s plan to boost foreign exchange earnings and external reserves in order to ease forex pressure.
The US bank stated this in a report titled, ‘Nigeria: Reform pause rather than fatigue (CBN’s financial accounts open a can of worms).’
The lender said the Central Bank of Nigeria’s net FX reserves were around $3.7bn as of the end of 2022, down from the $14bn it was at the end of 2021, based on its recently released reports.
It said, “Based on partial information from the audited financial accounts, we estimate that CBN’s net FX reserves were around $3.7bn at the end of last year, from $14.0bn at end-2021. In arriving at the said estimate we make a few assumptions which if incorrect would substantially change the picture.
“They include: (i) an addition of $5bn in IMF Special Drawing Rights to external reserves in order to arrive at total gross FX reserves of $37.8bn, broadly in line with the 30-day moving average of $37.08bn previously published on the central bank’s website; (ii) adjusting the gross external reserves with three key FX liability lines that include FX forwards (US$6.84bn), securities lending ($5.5bn) and currency swaps (US $21.3bn).
“And (iii) estimating currency swaps by backing out FX forwards and outstanding OTC Futures balances from an overall aggregate published i n the financial accounts.”
According to JP Morgan, the low net forex reserves mean a continued forex market pressure, adding however that the CBN can still source forex at commercial and semi-commercial rates.
The highly profitable nature of the currency swap arrangements between the CBN and domestic commercial banks is expected to continue for some time, it said.
Commenting on the government assets which can provide succor in the medium term, it stated, “For example, the President’s policy advisory council has recommended the government sell down its stake in the most joint-venture oil and gas assets, a proposal that is estimated to bring in up to $17bn.”
The US bank further said the recently announced $3bn loan to the NNPC could help partly improve FX liquidity conditions in the market, with the oil company selling the dollars to the CBN and remitting the naira proceeds to the government as upfront payments for oil revenues and taxes.
However, the large external financing needs of the private sector will sustain forex pressures, the bank warned.
Structural balance of payments deficit and a worse starting point for net FX reserves than previously anticipated are affecting the government’ ability to transition to a significantly more flexible exchange rate regime, according to the US bank.
This process of rebuilding reserve buffers is likely to be protracted as significant reforms are needed to attract foreign direct (and portfolio) investment on a multi-year basis, it said.
It added, “Perhaps short-term fixes could involve a swift improvement in oil output and significantly tighter monetary policy – authorities will have to increase the frequency of OMO auctions, which resumed last week.”
While commenting on Nigeria’s inflation rate, the bank projected that inflation rate will spike to 28 per cent by the end of 2023, and the naira will further depreciate despite the CBN’s efforts to stabilise the foreign exchange market.
The projection by JPMorgan is three percentage points higher than the 25 per cent inflation projection by the World Bank for 2023 because of petrol subsidy removal.
However, the World Bank noted that although there will be a significant increase in 2023, headline inflation will fall by the first quarter of 2024.
JPMorgan hinged its report on the impact of fuel subsidy removal, foreign exchange liquidity, and the recently published financial records of the CBN.
According to the bank, petrol prices have more than doubled, and the naira has depreciated by 40 per cent against the dollar in the official market.
The ripple effect of the managed float and the fuel subsidy removal has spiked inflation, which was 24.08 per cent in July.
It said, “We now see headline inflation rising towards 28 per cent by year-end. Although we expect inflation momentum to start downshifting from 4Q, headline inflation will still remain elevated, particularly on higher food costs.
“The president’s decision to keep a cap on petrol prices is likely to provide some relief, but the exchange rate is likely to remain on a depreciating path and put further pressure on prices, with the impact more broad-based.
“The CBN has had to tighten monetary conditions by hiking the monetary policy rate by a token 25bp last month, while narrowing the corridor around the MPR. Also, the CBN conducted its first Open Market Operation this year while charging a cash reserving ratio on banks that fall short of its target loan-to-deposit ratio of 65 per cent.
“Going forward, we think the CBN might focus on using other tightening tools, as opposed to raising rates via the MPR. As such, we keep our call for an unchanged MPR at 18.75 per cent for the rest of the year.”