Nigeria’s gross official reserves declined again in January 2022, falling by USD481m (-1.2% m/m) to USD40.04bn from USD40.50bn as of end of December 2021. Only last week, the gross official reserves declined below the USD40bn mark to USD39.98bn (03 Feb ’22), its lowest level in about three months. Notably, the external reserves have not received another significant boost since September ’21 when Nigeria issued a USD5bn Eurobond and received a USD3.3bn Special Drawing Right (SDR) allocation from the International Monetary Fund.
Total reserves as at end-Jan covered around 9.6 months of merchandise imports based on the balance of payments for the 12 months to September ’21, and 7.2 months when we add services. We consider this a healthy buffer, even when we assume no accretion to the reserves.
Despite the significant rise in oil prices, Nigeria’s reserves are steadily declining due to poor oil revenues. In 2021, oil output averaged around 1.4 million barrels per day (mbpd), compared with an OPEC quota of c.1,7mpbd. With non-oil based exports relatively low and accounting for less than 20% of total export earnings, the external reserves have remained under pressure.
Also, low capital inflow into Nigeria has not helped. With investors’ weak confidence in Nigeria’s macroeconomy, it is not surprising that they have reduced funds flow into the real sector as well as the capital market. Data from the National Bureau of Statistics (NBS) puts total capital inflow into Nigeria as at 9M ’21 at USD4.51bn, down 47.6% y/y.
In January ’22, the US Fed disclosed that it would raise rates at its March ’22 meeting. Similarly, the BoE (Bank of England) at its February meeting, concluded last week raised rates by 25bps while the ECB (European Central Bank) kept rates unchanged. That said, global central banks are expected to turn hawkish in 2022. This will result in capital flight away from emerging and frontier markets. The reversal of funds flows is likely to have a significant impact on these countries’ external reserves and currencies.
With global central banks projected to tighten monetary policy, we expect the CBN’s Monetary Policy Committee (MPC) to conduct two rate hikes of 50bps each in 2022. This is consistent with the IMF’s advice to emerging economies to assist them lower their vulnerabilities.
Source by FBNQuest Research
