September 8, 2021/Proshare

by FBNQuest Research

We see from CBN data that gross official reserves increased by USD610m to USD34.02bn in August. For a more accurate picture, we should adjust this gross figure for the pipeline of delayed external payments, which are estimated at +/- USD3bn. Total reported reserves at end-August covered 8.2 months’ merchandise imports on the basis of the balance of payments for the 12 months to March 2021, and 6.3 months when we add services.  

The cover is a little flattering. Fx has been in short supply under life with Covid-19, and Nigerians have made limited use of their education, health, and business travel allowances due to restrictions on movement both at home and in their favoured destination countries. On the return of normality (whatever shape it takes), they will make good use of these allowances, the net deficit on services will rise strongly and the import cover will soften. 

The pick-up in reserves follows the general allocation of SDRs by the IMF in late August. Nigeria’s share is about USD3.3bn although we should remember that its gross reserves are calculated on a 30-day moving average basis. In contrast, we see from our chart that the SARB has taken the allocation as a single transaction.  

The IMF’s managing director, Kristalina Georgieva, has called for “voluntary channelling” of SDRs from the Fund’s richest to its poorest members. This is less likely to take place on a bilateral basis (for reasons of transparency) than from transfers to one of the Fund’s vehicles for low-income countries such as the Poverty Reduction and Growth Trust. Nigeria does not qualify for these vehicles. 

Further reserves accumulation is due next month when the FGN returns to the Eurobond market for the first time since November ’18. Indications are that it will look to raise USD3bn although it has the authority from the National Assembly to borrow USD6.2bn externally.  

Foreign portfolio investors (FPIs) with Egypt and Nigeria on their radar will find the balance-of-payments for the nine months to March ’21 instructive. Nigeria has smaller deficits on the trade and current accounts but in other respects compares poorly with Egypt.  

We find a services surplus of USD3.2bn for Egypt despite a loss of about USD6bn in net tourism revenue (vs a deficit of USD8.3bn for Nigeria), and net workers’ remittances of USD23.4bn (vs USD12.2bn). Perhaps most telling is net FPI of USD15.3bn for Egypt over nine months (vs USD3.7bn for Nigeria).  In the absence of exceptional circumstances, investors are drawn to the familiarity of an IMF programme with conditions in place in support of government policy.

Official reserves (gross; USD bn)

Sources: CBN; South African Reserve Bank (SARB); Central Bank of Egypt (CBE); FBNQuest Capital Research