Nigeria external reserves expected to decline as CBN spends $1.7bn to clear FX backlog by October 2022

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Nigeria’s external reserves are expected to decline, according to the World Bank, as the Central Bank of Nigeria (CBN) is expected to clear $1.7 billion in foreign exchange backlog and forward contracts to foreigners by the end of October 2022.

In a document titled “Nigeria Development Update (June 2022): The Continuing Urgency of Business Unusual,” the World Bank revealed this.

Nigeria’s external debt had been falling due to the Central Bank’s constant intervention in the foreign exchange market to maintain the local currency’s stability.

What the World Bank has to say about it
“Boosted by higher oil exports, an allocation of Special Drawing Rights from the International Monetary Fund in August 2021, and a Eurobond issuance in September 2021, gross official reserves rose to US$41.3 billion (7.4 months of imports) at the end of 2021;offering an opportunity for exchange rate adjustment,” according to the World Bank.

“In March 2022, Nigeria issued additional Eurobonds worth US$1.25 billion. The CBN is expected to clear the FX backlog to foreigners (estimated at US$1.7 billion as of end-October) and FX forward contracts, so gross FX reserves are expected to decline in 2022,” the Bank added.

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Nigeria is also expected to see net portfolio outflows in 2022 as a result of the hawkish monetary policy seen in developed countries, according to the World. “FPI inflows increased significantly in 2021, exceeding US$6 billion,” the bank said (1.4 percent of GDP). This followed a significant drop in 2020, when net outflows totaled $3.6 billion as a result of the COVID-19 pandemic (0.8 percent of GDP).

“With the continued hiking of interest rates in the US and other advanced economies due to rising inflation, net portfolio inflows to Nigeria are expected to drop below 1% of GDP in 2022,” according to the World Bank. Portfolio investors are likely to be cautious in the run-up to the election, keeping net inflows low.”

What you need to know
Foreign reserves are assets held in reserve by a country’s central bank to support liabilities and influence monetary policy. Foreign banknotes, deposits, bonds, treasury bills, and other foreign government securities fall into this category.
These assets are held for a variety of reasons, but the most important is to ensure that a government or its agency has backup funds in the event that their national currency devalues rapidly. International or external reserves are other names for foreign exchange reserves.

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Nigeria’s external reserve increased by $5.15 billion in 2021, thanks to a $4 billion Eurobond secured by the federal government in September 2021 and a $3.35 billion IMF facility under the Special Drawing Rights, as reported earlier this year. Nigeria’s external reserves, on the other hand, are currently at $38.69 billion, down from $41 billion last year.
According to NBS data, capital imports into Nigeria decreased by 47.6% year on year in the first nine months of 2021, to $4.52 billion from $8.61 billion the previous year, with foreign direct investment (FDI) accounting for only 7.55 percent of the total.

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