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Nigeria’s Naira Rebounds Alongside A Decline In Dollar Reserves – Report

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Nigeria's Naira Rebounds Alongside A Decline In Dollar Reserves

Concerns have been raised that the central bank of Nigeria is reducing its dollar holdings to maintain the naira, despite having promised to allow the currency to float more freely, as the country is burning through its foreign exchange reserves at a rate not seen in four years.

As of April 12, liquid reserves stood at $31.7 billion, down 5.6% from March 18, when the naira began its ascent from record-low levels against the dollar, according to Bloomberg’s calculations based on the most recent data available from the Central Bank of Nigeria.

Relative to a comparable period, that is the largest decrease since April 2020, based on Bloomberg’s statistics.

The value of the naira dropped to around N1,900 to the dollar at the start of the year. A lot of investors had predicted that the naira would keep falling in value. But recently, the naira has strengthened and is now worth roughly N1,100 to the dollar.

According to Bloomberg, the move happened after the Central Bank of Nigeria implemented policies aimed at enhancing liquidity, drawing in capital, and letting the market set the value of the naira. The CBN promised to release a backlog of unfulfilled dollar demand as part of the reforms.

According to Charles Robertson, head of macro strategy at FIM Partners in London, “the CBN does appear to be using its FX reserves to clear the valid backlog, and return the naira to a realistic exchange rate.” “I assume they want to restore private sector liquidity to the foreign exchange market and inspire other investors, both domestic and foreign, to start investing in the local currency.”

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Nigeria continues to have a substantial buffer of foreign exchange reserves because to increases in oil prices and multilateral loan inflows. The IMF estimates that gross reserves of approximately $32.6 billion are sufficient to cover imports for roughly six months.

The central bank announced last month that it had paid out a backlog of past-due dollar purchase agreements, which amounted to an estimated $7 billion since the year’s start.

That was developed over many years as a result of the central bank’s currency peg to the US dollar, which made foreign exchange scarce and discouraged foreign portfolio investment. How much dollar debt the CBN has on its books is unknown, though.

The central bank had $7 billion in securities lending agreements with JP Morgan Chase & Co. and another $500 million with Goldman Sachs Group Inc., according to the publishing of its financial disclosures late last year.

It is not clear if those obligations have been settled. A spokesperson for the central bank didn’t immediately respond to Bloomberg’s request for comment on the telephone.

The FX reserves have fallen despite a surge of inflows into capital markets following 600 basis points of cumulative interest rate hikes in February and March, which increased the allure of Nigerian local debt. Foreign portfolio inflows exceeded $1 billion in February, bringing total receipts so far this year to at least $2.3 billion, according to the central bank.

“The CBN will also be aware that new inflows from Afreximbank, the World Bank, and a possible eurobond, plus the benefit of higher oil prices and a likely return of remittances via official and semi-official channels (rather than bitcoin) will allow reserves to stabilize or rise again,” Robertson said.

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