Data showing the Central Bank of Nigeria (CBN)’s scant interventions in the foreign exchange market prove that it is not defending the naira with its foreign reserves.
The CBN has only sold $581 million in the official market, otherwise known as the Nigerian Autonomous Foreign Exchange Market (NAFEM), this year, according to data from FMDQ Securities Exchange, which tracks trading activity.
That leaves the CBN’s sales accounting for only 3.2 percent of the total market turnover of $17.9 billion in the same period.
That’s a sign that the dollar supply that has greased the market and changed the fortunes of a currency that has gone from the world’s worst performing currency to the best in two months is being driven by supply from autonomous sources rather than the CBN’s supply.
Investors say the CBN’s policies, from higher market interest rates to the clearance of the outstanding FX forwards backlog, have restored confidence in a once broken market, leading to increased dollar inflows and little need for CBN supply.
The last one of the CBN’s seven interventions in the official market happened on the 21st of March when it sold $54 million, contributing slightly above 10 percent of the total market turnover of $523.74 million on the day.
When the apex bank’s paltry $60 million sales to BDCs this year (since lifting a 3 year-old ban on dollar sales to the informal traders) is factored in alongside the $581 million sold at the official market, the total CBN interventions come to $641 million.
In comparison, Nigeria’s external reserves shed $2.16 billion in the past month, falling to a seven-year low of $32.29 billion on April 15, 2024 from $34.45 billion on March 18, 2024, according to CBN data.
That figure is however more than double of the combined interventions of the CBN in the market, making it improbable that the shortfall in the external reserves has gone into the naira defence.
“We may not know what caused the drop in FX reserves but data from NAFEM shows the reserve drop did not flow into FX sale nor was it used to defend the currency,” a market source familiar with the matter said.
“The CBN pays debt repayment and coupon from the reserves so it has other obligations. There is no data evidencing this so-called naira defence with reserves,” another source said.
Olayemi Cardoso, the CBN governor, provided some clarity on the decline in reserves, linking it to some debt repayments rather than defending the naira.
“What you see with respect to the shifts in our reserves is the shift you will find in any country’s reserve situation where for example debts are due and certain payments need to be made and they are made because that it also part of keeping your credibility intact,” Cardoso said during the IMF/World Bank spring meetings Wednesday.
Nigeria faces significant external debt service requirements, including payments on Eurobonds and other international financial obligations.
The repayments of these debts require substantial amounts of foreign currency, further draining the reserves.
Nigeria spent about half of its dollar earnings to service external debts between January and October 2023.
According to data from the CBN, out of the $6.11 billion in total outflows made during this period, $3.07 billion was spent on servicing external debt.
Isaac Marshall, a senior investment analyst at TLG Capital, said the Central Bank is “defending the naira simply by honouring the backlog of USD conversions that market participants have been hoping to complete for years.
“The result is that the enormous queue of USD/NGN conversions at the Central Bank has finally ended and the currency is nearly synchronised across the parallel and official markets.
“Using reserves to honour legal/proper transactions is the raison d’etre of a Central bank’s FX reserve. In this light, the depletion of reserves over the past month is a positive for both the currency and the Nigerian macro,” Marshall said in a Linked-In post.