October 25, 2023/CSL Research

The Minister of Finance, Wale Edun, earlier in the week announced plans by the government to raise c.US$10bn from two sources to stabilize the foreign exchange market amidst severe dollar shortages which has caused the Naira to fall to record lows. The Naira fell to a record low of c. N1,300/US$ at the parallel market yesterday and fell to a low of N847.77 at the I&E window on Tuesday. According to the Minister, two tranches of forward sales of Gas by NNPC will raise c.US$7bn and US$3bn will be raised through a soft credit from Qatar. 

So, essentially, the Federal Government expects to get US$7bn from Goldman Sachs, an asset Manager to the CBN, pledging receipts of future gas sales. This loan will net off gas revenues from WAGPCo and NLNG over the repayment period. This means that this US$7bn will not accrue to the reserves in future. As of October 2023, the CBN reported gross FX reserves of US$33.28bn. However, the CBN has a number of obligations which either means such money will not accrue to the reserves as in the case of securities lending or will need to paid from the reserves. There is the securities lending of US$7.5bn owed to Goldman Sachs and JP morgan. There are also other obligations like swap positions with banks and unsettled FX transactions. 

Since the unification of the rates at the official foreign exchange (FX) windows, the Naira has declined by 83.15% to N847.77/$ as of 24 October 2023 from N462.88/$ (price prior to the new policy) at the I&E Window. However, the real shocks of the policy are being seen at the parallel market leading the Naira to fall to a record low of N1,310/US$ on 24 October 2023. With little control over the depreciation of the nation’s currency, the then acting governor of the Central Bank of Nigeria (CBN), Mr. Fola Shonubi, announced plans to put in place new policies that would guide the dealings of FX to boost supply in the market but there has been no respite to the FX crisis. 

Earlier in August, there were news reports that the Nigerian National Petroleum Corporation Limited (NNPCL) had entered into a crude for cash funding agreement with the African Export-Import Bank (Afrexim) to the tune of US$3bn. This was not a crude for refined products swap but rather advance payment for future crude deliveries. This was expected to provide the government with sufficient dollar liquidity to stabilize the Naira. Expectations of the rollout and disbursements from the CBN and the NNPCL prompted a knee-jerk reaction in the parallel market as the Naira recovered slightly following the news but the situation has since worsened. 

We reiterate that with encumbered FX reserves, CBN has very little means to defend the currency and these intermittent injections can only provide stability in the short term. Since demand still outstrips supply by a very wide margin. We are also concerned that this shock may be too hard on the fragile economy and the average consumer. Already, the FX crisis has begun to impact the cost of petrol and fuel queues have started to resurface. The government needs to explore sustainable means of increasing the supply of FX as a matter of urgency to avert an economic crisis