The Green Shoots of Recovery Are Here: A Steady Rise in Foreign Exchange Reserves

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Olaseni Durojaiye writes on the steady rise in the nation’s foreign exchange reserves, accompanied by the recently oversubscribed $1 billion Eurobond

The steady rise in the nation’s foreign exchange reserves in the last three months and the success of the recently issued $1 billion Eurobond, which buoyed the Central Bank of Nigeria (CBN) to target a $40 billion forex reserves threshold by the third quarter of the year has begun to generate measured excitement amongst economic policy analysts and operators in the economy.

Recent statistics on the CBN website revealed that the foreign exchange reserves increased from $24.0 billion on November 9, 2016 to $28.7 billion on February 9, 2017.
The widely held expectation is that the accretion holds promises of improvement in the nation’s economy particularly in the FX markets as some analysts opined that it is capable of solving the FX challenge in the economy.

However, a few others argued that the rise must be matched with appropriate policy to address the demand and supply sides of the FX challenge, insisting that without the appropriate policy the increases may not impact the economy.

While some traced the foreign reserves increase to the gradual increase in crude oil receipts, owing to jump in oil price and oil production, some money market experts insisted that the slowdown in allocation to the FX markets by the CBN might have contributed to the reserve accretion.

The apex bank toed this line. An official of the bank who was part of the country’s delegation that went on a road show to the United Kingdom and the United States reportedly insisted that the strategy adopted by the apex bank helped to boost investor confidence in the economy and the country’s ability to meet its foreign obligations, leading to the success of the recently oversubscribed Eurobond.
The CBN official had stated: “With a comfortable level of FX reserves, foreign investors will be assured that once they want to take their funds out, they can do so without hindrance.

“If you noticed, once reserves fell to as low as $21 billion, investors were not attracted to the Nigerian economy, irrespective of whether we devalued or whatever we did with the FX market. As long as they felt that you had insufficient reserves to meet your foreign obligations, they were not going to remain comfortable about investing in the Nigerian economy. They continued to exit the economy. What this means is that investors need to feel comfortable with your level of FX reserves and your ability to meet your obligations when they fall due.

“So instead of the CBN getting distracted by the debate over devaluation or no devaluation, it has focused on reserves accretion, which as you know, helps to attract investors during the Eurobond sale last week. Given what we know, the target by the CBN is to increase reserves to $35 billion by the middle of this year and $40 billion by the end of the third quarter,” he said.

However, concerns bordering on sustainability of the foreign reserves accretion persist, given that records indicate crude oil sales account for the swelling of the foreign till.
While some currency and economic experts are not sure if the current accretion is sustainable amid a falling naira and shortage of the greenback in the FX markets and the economy, others feared that a slump in the international oil market could affect the accretion.

Besides, the concern, investigations revealed, is further fuelled by the amount spent by the apex bank to defend the local currency last year. It will be recalled that despite the staggering fall in the value of the naira in 2016, the CBN spent $4 billion to defend the naira against the greenback and other major currencies during the period.
The defence of the naira by the CBN was severely criticised by economists who argued that forces of demand and supply should be allowed to determine the exchange rate of the naira.

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Speaking to THISDAY, an economist and senior analyst with the Nigerian Economic Summit Group, Wilson Erumebor, stated that, “The facts here are pretty clear. Accumulation of reserves to about $30 billion is largely as a result of a higher crude oil price and relatively stable output. If both scenarios linger, reserves would continue to increase in 2017 and could hit 40 billion as anticipated.”

Continuing, Erumebor insisted that, “Nigeria’s issue of $1billion Eurobond being oversubscribed should not be a surprise. Take a look at Ghana for instance that issued a $750 million Eurobond in 2016 with yield of 9.25 per cent. Despite the fact that Ghana has been experiencing some economic challenges in the past few years, the bond was more than five times oversubscribed.

It is clear that investors are looking for high yields in developing market. The yield is also a function of the perceived risk of the bond. So, the higher the level of risk associated with the investment, the higher the expected returns. If you look at the global landscape, currently, government bond yields for many developed countries lie between 0 and 3 per cent. Only few developed countries, such as Greece, for instance, have yields of around 7 per cent due to their economic challenges. With this, a 7 per cent yield from a country like Nigeria is attractive to investors,” he explained.
Also, in his submission, a Port Harcourt, River State-based analyst, Ezeh Wordu, explained that the accretion could ensure a “relatively stable” exchange rate.

According to Wordu, “A positive spill-over effect of this is also relative stability in exchange rate due to increased supply of FX in the interbank market. This also reduces the prospects of a wider exchange rate premium, that is, the difference between the official and parallel markets,” he stated.
Meanwhile, in looking beyond the oversubscribed Eurobond, analysts have identified some of the key sectors that government should fund with the Eurobond to include industrial parks, agro-processing and other infrastructure needs of the country including power generation and distribution.

“I think a bigger issue we should pay attention to is the use of this proceed. What projects will be funded with the money derived from the sale of the Eurobond? In my view, such funds should be used strategically to finance the building of industrial parks, agro-processing zones and other targeted infrastructure projects with high-value and direct impact on government revenue, the business environment and citizens,” Erumebor stated.