Fitch Report Shows that 30% of Nigeria's Reserves are FX Swaps and that Reserves Will Drop to $32.2B

Fitch Ratings has estimated that approximately 30% of Nigeria's external reserves are made up of foreign exchange (FX) bank swaps.

This disclosure highlights ongoing uncertainties regarding the country's net FX reserves, exacerbated by opaque entries amounting to nearly $32 billion in FX forwards, over-the-counter futures, and currency swaps listed as off-balance sheet commitments in the Central Bank of Nigeria's (CBN) 2022 financial statement.

Why this matters: The uncertainty surrounding Nigeria's foreign exchange reserves has significant implications for the country's economic stability and creditworthiness. A decline in reserves could lead to a loss of investor confidence, potentially triggering a currency crisis and impacting the overall economy.

According to Fitch,"the lack of clarity over the precise size and composition of Nigeria's foreign exchange reserves remains a major constraint on the nation's sovereign credit profile. "The FX reserves have seen a decline, falling from $34.4 billion in mid-March to $32.2 billion by the end of April, partly due to debt repayments and FX sales to Bureau de Change operators to bolster the naira.

CBN Governor Yemi Cardoso attributes the decreasing reserves to debt repayments and other standard financial obligations, rather than efforts to defend the naira. Fitch projects a steady current account surplus, averaging 0.5% of Gross Domestic Product (GDP) for 2024-2025, supported by an expected modest increase in oil production and remittances. However, the FX reserves are projected to diminish to cover just 4.2 months of current external payments by the end of 2024, aligning with the 'B' median.

The Nigerian naira has continued to weaken amidst increasing dollar demand, particularly from parents paying foreign school fees and travellers. The suspension of Bureau De Change operations in July 2021 has contributed to market volatility, with the naira depreciating from around N500 to the dollar before the suspension to N1,410 in the unofficial market as of May 2024.

The CBN has issued various directives to stabilize the currency, including utilizing BDCs to satisfy demand and aiming to align parallel market rates with the Nigerian Autonomous Foreign Exchange Market (NAFEM). As of May 2024, the naira traded at N1,402.67 in the NAFEM market, a 0.83% decrease from April's rate of N1,390.96.

Despite recent reforms by President Bola Tinubu's administration to support macroeconomic stability and enhance policy coherence, Nigeria's external reserves remain under pressure. The significant portion of FX bank swaps and opaque entries in the reserves, coupled with the naira's continued depreciation, underscore the challenges faced by the CBN in managing the country's foreign exchange market and maintaining a stable currency.

Key Takeaways

• Fitch said that 30% of Nigeria's external reserves are FX bank swaps, causing uncertainty.
• Unclear FX reserves threaten economic stability and creditworthiness.
• Nigeria's FX reserves declined from $34.4bn to $32.2bn in April 2024.
• Naira weakens to N1,410 in parallel market amid high dollar demand.
• CBN struggles to manage FX market and maintain stable currency.