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.
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.
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.
