According to global credit ratings agency Fitch, approximately 30% of Nigeria’s external reserves comprise foreign exchange (FX) bank swaps, indicating ongoing uncertainties regarding the nation’s net FX reserves. The revelation comes amidst concerns surrounding opaque entries amounting to nearly $32 billion in FX forwards, over-the-counter futures, and currency swaps listed as off-balance sheet commitments in the Central Bank of Nigeria’s (CBN) consolidated financial statement for 2022.
Fitch’s assessment underscores the lack of clarity surrounding Nigeria’s FX reserve position, a significant constraint on the nation’s sovereign credit profile. Despite this, Fitch anticipates that most of the FX bank swaps will likely be rolled over, offering temporary stability in reserve management.
The report also notes a recent uptick in non-resident inflows into Nigeria, driven by greater formalization of FX activities and tighter monetary policy measures. While this has led to the appreciation of the Naira at the official FX window following a substantial depreciation earlier, Fitch highlights lingering exchange rate volatility as a risk to economic stability.
Furthermore, Nigeria’s gross FX reserves have declined, dropping from $34.4 billion in mid-March to $32.2 billion by the end of April. Fitch attributes this reduction partly to debt repayments and FX sales to Bureau de Change operators aimed at shoring up the currency.
Looking ahead, Fitch projects a steady current account surplus averaging 0.5% of GDP for 2024-2025, supported by modest increases in oil production and remittances. However, FX reserves are expected to diminish to cover just 4.2 months of current external payments by the end of 2024, aligning with the ‘B’ median.
It’s worth noting that CBN’s Monetary Policy Committee members have previously attributed the decline in Nigeria’s FX reserves to foreign exchange swap transactions. Despite recent fluctuations, there has been a marginal recovery in FX reserves, indicating a slow rise after a period of decline.
