• Reserves rise to $30.5bn as Bank assures importers’ demand will be met through FX forwards

By Obinna Chima

The strategy adopted by the Governor of the Central Bank of Nigeria (CBN), Mr. Godwin Emefiele to rebuild the country’s foreign exchange reserves has been identified as one of the primary reasons the country’s Eurobond issue was oversubscribed by 780 per cent last week, THISDAY has learnt.

Investigations have shown that as of last week, Nigeria’s foreign reserves, which had hit $29.5 billion, climbed to $30.5 billion – the highest in more than 12 months – following the success of the Eurobond.

A CBN official, who accompanied Emefiele and others in the federal government delegation on the Eurobond road show to the United Kingdom and United States of America, informed THSDAY that the strategy adopted by the governor worked wonders in boosting investors’ confidence in the Nigerian economy and the country’s ability to meet its foreign obligations.

He also disclosed that with the single-mindedness exhibited by the CBN governor to rebuild FX reserves, he has set a target to grow reserves to $35 by the middle of 2017 and $40 billion by the end of the third quarter of this year.

The official, who preferred not to be named but is one of the architects of the central bank’s FX policy, held the view that contrary to the argument by several analysts that devaluing the currency and allowing a true float of the naira would attract foreign investors, it is actually the accretion of foreign reserves that would instill confidence in the economy.

“With a comfortable level of FX reserves, foreign investors will be assured that once they want to take their funds out, they can do so without hindrance.
“If you noticed, once reserves fell to as low as $21 billion, investors were not attracted to the Nigerian economy, irrespective of whether we devalued or whatever we did with the FX market.

“As long as they felt that you had insufficient reserves to meet your foreign obligations, they were not going to remain comfortable about investing in the Nigerian economy. They continued to exit the economy.

“For example, look at South Africa and Kenya which have floating exchange rates, yet they have found it difficult to attract investors. They continue to flee their economies in droves.

“However, since the International Monetary Fund (IMF) announced in November that it had approved a $12 billion standby facility for Egypt, the country has been attracting almost $300 million a month.

“What this means is that investors need to feel comfortable with your level of FX reserves and your ability to meet your obligations when they fall due.
“So instead of the CBN getting distracted by the debate over devaluation or no devaluation, it has focused on reserves accretion, which as you know help to attract investors during the Eurobond sale last week.

“Given what we know, the target by the CBN is to increase reserves to $35 billion by the middle of this year and $40 billion by the end of the third quarter,” he said.

The official said the accretion of FX reserves could be attributed to two factors – the improvement of oil prices following the agreement by OPEC and Russia to slash oil production by 1.2 million barrels per day, and the relative peace achieved in the Niger Delta.

“The oil price rally coupled with improved output from Nigeria have resulted in increased foreign earnings in recent months.

“If you recall, about a year ago, revenue from the sale of crude oil fell to less than $400 million a month, but now Nigeria is making between $600 million and $700 million, enabling the CBN to save more,” he explained.
He was quick to add, however, that whatever savings the central bank is making must be complemented by a comprehensive fiscal and industrial strategy by the ministries and agencies of government.

“A fiscal and industrial strategy is still required, because saving FX reserves alone will not give you the silver bullet,” he said.

The official also allayed concerns that the savings being made by CBN could delay payments of maturing trade obligations and in turn continue to exert pressure on the FX market.

He said: “The CBN remains committed to funding maturing trade obligations through FX forwards on the interbank market.
“Importers with eligible transactions have nothing to be concerned about, as the central bank will continue to support them through the forwards arrangement already in place on the interbank market.

“Also, confidence is growing that the speculative attacks on the naira in the parallel market would subside, because with the accretion of reserves, the CBN will have a schedule that would enable it to meet demand through FX forwards.”

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