Nigeria’s foreign exchange reserve will fall in 2022 as the Central Bank of Nigeria plans to clear about $1.7bn in FX backlog to foreigners and FX forward contracts, the World Bank has said.
It stated that the nation’s reserves rose to $41.3bn at the end of 2021, which offered it an opportunity for exchange rate adjustment.
In its ‘Nigeria Development Update (June 2022): The Continuing Urgency of Business Unusual,’ the global bank said, “Boosted by higher oil exports, International Monetary Fund’s Special Drawing Rights allocation in August 2021, and a Eurobond issuance in September 2021, gross official reserves rose to $41.3bn (7.4 months of imports) at the end of 2021; offering an opportunity for exchange rate adjustment.
“Nigeria issued additional Eurobonds for $1.25bn in March 2022. However, gross FX reserves are projected to decline during 2022, as the CBN is expected to clear the FX backlog to foreigners (estimated at $1.7bn as of end-October) and FX forward contracts.”
The bank said direct investments in Nigeria have been low in 2022 because the nation’s fluctuating exchange rate has been discouraging investors.
It added that foreign direct inflows into the nation were less than one per cent of Gross Domestic Product in 2021 despite higher oil prices which should have driven portfolio investments into the nation. It added that Nigeria’s current account is expected to strengthen in 2022.
The World Bank said the nation’s current account improved in 2021 as a result of its economic recovery from COVID-19 and further improvement is expected in 2022 due to increases in oil prices, remittance inflows, and non-oil exports.
It said, “In 2021, the current account deficit narrowed from 3.8 per cent of GDP in 2020 to 0.4 per cent in 2021, driven by an increase in exports stemming from the rebound in oil prices.
“In contrast, imports remained subdued and declined by 4 per cent year-on-year. This was partly due to FX scarcity, as the private sector reported shortages of FX even for “allowed” imports.8 Remittance flows also recovered to pre-pandemic levels in 2021.
“In 2022, higher oil prices are expected to push the current account to a surplus for the first time since 2018, amounting to a projected 2.8 per cent of GDP. Direct investments have been persistently low in 2022, as exchange rate management issues deter investors. Net foreign direct investment inflows in 2021 remained at less than 1 per cent of GDP, despite higher oil prices which have historically driven higher portfolio investment flows into the country.”
The bank said even though the CBN was making progress in harmonising the two main exchange rates, its reform remained incomplete, as the persistence of multiple rates continued to discourage private investment.
It added that rising interest rates in the United States and other advanced economies would likely lead to an outflow of net portfolio investments from the nation as investors move their investments to certain environments.
It further said that pre-election is likely to add to the hesitance of portfolio investors, keeping net inflows low.
According to the bank, exchange rate policy clarity and transparency in the Nigerian government’s management are necessary to attract more significant capital inflows, including FDI into the nation.
