Nigeria’s foreign reserve has been projected to surpass the $40 billion threshold by September 2021, following the $3.35 billion direct allocations approved by the International Monetary Fund. This was disclosed by experts from EFG Hermes during a financial roundtable held virtually.
Recall that Nairametrics reported earlier in the month that Nigeria is set to receive an allocation $3.35 billion as part of a historic general allocation from the IMF. This is part of a $650 billion SDR allocation, which is aimed at providing a boost to countries’ resources in order to help narrow external funding gaps and increase reserves.
According to a report, released at the virtual roundtable, Nigeria is regarded as the largest relative gainers from the SDR allocation within their coverage universe. Specifically, the report noted that the direct allocation would boost reserves by c10%, while an additional planned minimum $3 billion Eurobond issuance could boost reserves by c20% to over $40 billion.
Also, such a boost according to EFG Hermes would complement high crude oil prices to improve the country’s FX position, which remains contingent upon further Naira adjustment. Recall, that the Central Bank of Nigeria (CBN) recently banned the sales of forex to BDC agents, in a move to defend the naira from illegal sales of forex in the county.
The CBN Governor announced the decision during the MPC meeting, relating the action of the BDCs mishandling FX as putting the country’s financial system at risk as they looked for abnormal returns. According to EFG’s report, at face value, the decision chops off nearly $450 million/month of FX supply (c30% of total FX supply to the market).
Meanwhile, a cursory look at the data from the CBN reveals that Nigeria’s forex reserve has gained about $176.13 million, month to date at $33.58 billion, which is still a distant level from the projected $40 billion by EFG Hermes.
What EFG Hermes is saying
“CBN has recently taken a relatively symbolic move to unify exchange rates; possessing the ammunition to ease FX shortages later this summer would encourage further Naira weakness (we maintain a target of N430/$1), together with further upward adjustment in domestic market rates.
We would turn way more bullish if Nigeria benefited from on-lending, but we see it as unlikely that this administration would engage in an IMF programme of any sort,” the report said.
According to Kato Mukuru, the Managing Director, Head of Frontier Markets Research, with the boost from the SDR allocation, Eurobond issuance, and more swaps, we could see an attempt by the CBN to clean up some of the backlogs and try to harmonise the exchange rate. These in his opinion could see the naira strengthen at N430/$1.
What are SDRs
SDRs are the IMF’s unit of account and are basically the fund’s reserve assets held by member countries. The value of SDR is pegged to a basket of currencies, as follows: USD at 41.73%, EUR at 30.93%, GBP at 10.92%, Yen at 8.33% and Yuan at 8.09%. Member countries can convert their SDR holdings into currencies when needed; the cost is negligible and depends largely on short-term interest rates.
Member countries are allocated their share based on their quota in the fund. For the proposal to be approved, it requires an 85% vote.
The allocation can be seen as nearly a free lunch: it is a direct boost to a country’s foreign reserves, without increasing the debt burden and without any strings attached.
The utilisation of the allocation can vary based on countries’ discretion. In 2009, most countries just kept the SDRs as is, in their reserves. In some other cases, countries used this to pay down obligations to the IMF, or in some cases, used it as fiscal stimulus.