WITH OIL EARNINGS EXPECTED TO CLIMB, FOREIGN EXCHANGE RESERVES JUMP TO $33.2B.

Nigeria has increased its foreign exchange reserves to $33.25 billion due to expectations that the government will outperform its forecasts for crude oil earnings.

The country's FX reserves increased by $140 million, ending the weekend with $33.25 billion, maintaining a build-up that had experts expecting a better outlook. The reserves completed the penultimate week at $33.11 billion, having closed 2023 at $32.91 billion.

Over the weekend, the price of Brent crude oil increased 1.6% to $78.48/bbl as concerns about a shortfall of supply were heightened by growing tensions in the Middle East and disruptions in the US economy.

The 2024 demand estimate by the International Energy Agency (IEA) was updated to 1.24 million barrels per day.

Coronation Asset that the price of crude oil will remain above the government's projected 2024 budget of $77.96 per barrel.

Nigeria's foreign reserves reached a height of $37.211 billion on January 16, 2023, and ended 2022 at roughly $37.08 billion. The Central Bank of Nigeria (CBN) faced with devaluation, which resulted in a string of prolonged losses.

On the forex markets, the naira is under pressure. The naira dropped by 1.3% to N902.45 per dollar at the government-recognized Nigerian Autonomous Foreign Exchange Market (NAFEM), a market-driven exchange. At the vast, unreported “black market,” or parallel market, the value of the naira dropped by 7.6% to close at N1,340.00 per US dollar.

Additionally, NAFEM's momentum of activity decreased by 33.3% to $505.8 million.

Due to a substantial mismatch between supply and demand, the majority of economists predicted that the naira would continue to weaken in the interim.

According to Cordros Capital, restrictive forex liquidity circumstances would persist until anticipated inflows of currency are received.

Therefore, we anticipate that the pressure on the local currency will continue in the foreseeable future. However, given the anticipated inflows of foreign capital as directed by the government, the CBN's recent moves to clear its forex backlog, and the stable trajectory of short-term interest rates, Cordros Capital expects international investors to closely monitor the development in the currency arena.

The World Bank had announced that it was taking Nigeria's request for $1.5 billion in funding to support significant policy reforms into consideration. Provided by the Development Policy Financing (DPF), which also helps nations improve institutions and policies that stimulate certain industries and economies.

Prof. Uche Uwaleke, president of the Association of Capital Market Academics in Nigeria, stated that in order to aid in its foreign exchange recovery, Nigeria must reduce its undue reliance on imports.

“It goes without saying that the only long-term solution to the current foreign exchange crisis is export-base diversification.” The government's approach seems to entailing the borrowing of dollars to increase liquidity in the short run. However, unless the uncontrollably high demand for FX is addressed, it might not see any notable success.

“In order to reduce the pressure on demand, I propose that the government implement a ”Buy Nigeria law,“ which would be similar to the 1933 ”Buy America Act“ and the more recent ”Build America, Buy America Act of 2021, to force consumers to alter their buying habits.

Furthermore, the import data from Nigeria lend support to the CBN's review and expansion of its currency swap agreement with the Peoples Bank of China.

Since China accounts for the majority of Nigeria's imports, it makes sense to look at ways to settle these transactions in Yuan rather than dollars. This was the concept underlying the relatively insufficient money exchange with China. Panda bonds, which are cheaper than Eurobonds and are denominated in Chinese Yuan, can be issued by Nigeria to boost the amount of Yuan in our foreign reserves, according to Uwaleke. But he clarified that the rise in foreign exchange reserves was a good thing for the Nigerian foreign exchange market.

Foreign exchange reserves will continue to rise, according to Mr. Olatunde Amolegbe, Managing Director of Arthur Steven Asset Management, who has previously said that this will support government attempts to support market stability and liquidity.

The increase suggests improved foreign exchange market liquidity. According to Amolegbe, the existing FX has to be improved by the government. If the increase is steady and consistent, this should eventually help to stabilize the naira's exchange rate or possibly strengthen it compared to the dollar.

According to him, it is imperative to put in place a more open system that discourages rent-seeking and arbitrage.