CBN counters JP Morgan’s N3.7bn estimate of Nigeria’s net FX reserve

Business A.M

The Central Bank of Nigeria (CBN) has faulted the recent estimate of the country’s foreign exchange (FX) reserves presented by JP Morgan. The apex bank said the presentation was “out of context”, while reassuring there was no cause for panic.

Hassan Mahmud, director of monetary policy department, CBN, made the clarification recently on the Moneyline television programme aired  on Africa Independent Television (AIT).

Prior to the development, JP Morgan had in a report, estimated the value of Nigeria’s FX reserves at $3.7 billion against the $33.8 billion published by the CBN.

The American investment bank stated  that factors including foreign exchange forwards, securities lending, currency swaps, and outstanding contracts have weakened Nigeria’s net external reserves to an all-time low of $3.7 billion as of the end of 2022.

However,Mahmud argued that contrary to the inference stipulated by J.P Morgan, the central bank has tried to be transparent as much as possible. He stressed further that reserves, like any account balance, are a flow that changes at any particular time.

According to the CBN director, fluctuations and liabilities encumbrances to the reserves were only natural and normal, adding that the apex bank built the reserves to defend the naira in terms of its value to other currencies, while close to 80 per cent of the reserves are CBN’s funds.

He noted further, “We read the JP Morgan numbers in-house and didn’t panic. That’s not the first time we see people and institutions reeling out numbers; they must have their intentions to do that, whether to rouse market sentiments or mislead the public.

“But, as much as possible, the central bank has tried to be transparent. What I will say about those numbers is that it is funny that number one, reserves, like any account balance, is a flow; some changes go within it at any particular time.

“Two, even if you have outstanding liabilities, you don’t mark the exceptional liabilities to market on a day and say this is your net balance.

“I can have $20 million in my account, and I owe someone maybe $13 million that is supposed to be paid in 2027; you can’t come in 2023 and say if I remove that $13 million, your money is $7 million or you are having $7 million.

“Now, I am not having $7 million; I am having $20 million. Because before I took a facility of $13 million, I know I will get $17 million in the next three years to pay you back.”

“But for you to come and tell me that no, your balance is $7 million, and you can’t pay back in three years, it’s just putting it out of context.”

Mahmud explained further that when the federal government or the oil export receipts come to Nigeria, it comes through the central bank which monetises it to naira, and is used by the federal government in the implementation of its budget.

“So, that dollar component sits with the central bank, and the purpose of the dollar component, one, is to build the confidence of the international community in the capability of the central bank to meet its trade commitment, and so you will see measurements around what months of imports either goods and services or goods only can your reserves cover?

“That gives some confidence to foreign investors trading with Nigerian investors in terms of import and export. Two, in the event that, for example, we have a float-managed exchange rate regime – in the event that the value of your currency is significantly depreciating or appreciating or whatever direction it is going – the central bank has the firepower to intervene in the market such that you bring the price to your expected or optimal equilibrium rate,” he said.

Mahmud also emphasised that the reserve is not meant for just trading, explaining that if there are also shortfalls in the build-up of those reserves, a swap or other engagements that are legally allowed by the CBN Act are utilised over a short period of time.

“The exchange rate, like we mentioned several times, is also part of the tools to address price stability, including leading to inflation and all that.

“So, the reserves are tools we can comfortably use to build investors’ confidence in the Nigerian economy and also build the sovereign confidence in terms of our exposures to multilaterals the CBN is owing and service its debts,” the CBN director added.