Gross Official Reserves Declined by US$650m to US$34.23bn in May 2021

We note from CBN data that gross official reserves declined by USD650m to USD34.23bn in May. For a more accurate snapshot, we should adjust this gross figure for the pipeline of delayed external payments: this adjustment was estimated at up to USD3bn by the IMF in late 2020.

The FBN is adamant that the figure is rather lower and we see from data from FMDQ that the CBN’s contribution to inflows at the investors’ and exporters’ window (I&E) is on an upward trend, notably in the week of 21 May.

Reserves at this level are not a cause for alarm in our view because the CBN/FGN can plausibly identify four potential sources of augmentation: Eurobond issuance (on its way, it is said), conversations within the IMF on a new allocation of SDRs to all members, positive trends in oil prices and Nigerian production due to the easing of curbs by OPEC+, and perhaps some sizeable multilateral soft loans.

Total reserves at end-May covered 7.8 months’ merchandise import cover on the basis of the balance of payments (BoP) for 2o20, and 5.7 months when we add imported services.

The cover has improved a little now that the BoP data for Q4 ’20 is available because fx has been in short supply under life with the Covid-19 virus since March ’20. Nigerians have made very limited use of their education, health and business travel allowances due to restrictions on movement both at home and in destination countries.

Whenever we return to said normality, Nigerians will again make good use of those allowances, the deficit on services will rise sharply and the months’ import cover will deteriorate. This point emerged in our recent note on the current account (Good Morning Nigeria, 07 June 2021).

For foreign portfolio investors (FPIs), Nigeria and Egypt have a number of similarities. Our chart shows a gentle rise in reserves for Egypt this year and a slightly less gentle decline for Nigeria. Egypt now has a healthier BoP than Nigeria by virtue of its better performance on services and transfers (remittances, essentially), and of its continuing ability (unlike Nigeria due to the pipeline) to attract FPIs in good numbers to its local securities markets (equities and debt).

One possible rescue lies in the CBN’s extension of its “naira 4 dollar scheme” until further notice. At this point we do not have the data to determine whether the incentives are sufficient to make a sizeable impact on remittances and therefore indirectly on reserves. Another, and more likely in our view, is the rise of UK Brent crude above USD70/b and the commendable discipline of the OPEC+ alliance.