According to JP Morgan, the federal government stands to gain up to $17 billion from the sale of its interests in the majority of joint ventures’ oil and assets.
The prediction from the US bank was made in light of the government’s intention to increase foreign currency revenues and external reserves in an effort to reduce foreign exchange pressure.
In a paper titled “Nigeria: Reform pause rather than fatigue (CBN’s financial accounts open a can of worms),” the US bank made this claim.According to the lender’s recently issued statistics, the Central Bank of Nigeria’s net foreign exchange reserves stood at approximately $3.7 billion at the end of 2022, compared to $14 billion at the end of 2021.
It stated, “We estimate that CBN’s net foreign exchange reserves were approximately $3.7 billion at the end of last year, from $14.0 billion at the end of 2021, based on partial information from the audited financial accounts.” A few assumptions that we make in order to get at the above estimate, if proven wrong, might significantly alter the situation.”They consist of:
(i) adding $5 billion in IMF Special Drawing Rights to external reserves to reach a total gross foreign exchange reserves of $37.8 billion, roughly in line with the $37.08 billion 30-day moving average previously posted on the central bank’s website;
(ii) modifying the gross external reserves by adjusting it with three major FX liability lines, which are currency swaps (US $21.3 billion), securities lending ($5.5 billion), and foreign exchange forwards (US $6.84 billion).
Furthermore, by subtracting outstanding OTC Futures balances and FX forwards from the total aggregate that is disclosed in the financial records, one can estimate currency swaps (iii).
Although the CBN can still source forex at commercial and semi-commercial rates, JP Morgan notes that the low net foreign reserves indicate ongoing pressure on the FX market.According to the statement, the CBN and domestic commercial banks’ extremely profitable currency swap agreements are anticipated to last for a while.
“For example, the President’s policy advisory council has recommended the government sell down its stake in the most joint-venture oil and gas assets, a proposal that is estimated to bring in up to $17bn,” the statement read, referring to government assets that can give succor in the medium term.
The US bank added that the NNPC’s recently announced $3 billion loan could contribute to improving FX liquidity circumstances in the market to some extent. The oil corporation will sell the dollars to the CBN and send the government the naira proceeds as upfront payments for taxes and oil earnings.
The bank did caution that FX pressures will persist due to the private sector’s significant external funding requirements.
The US bank claims that the government’s capacity to move to a far more flexible exchange rate regime is being hampered by a structural balance of payments deficit and a worse starting place for net foreign exchange reserves than initially projected.