A potential shock to Nigeria’s short-term economic stability bordering on the size of the country’s foreign reserves seems to have been averted. Just as Nigerians were trying hard to come to terms with the puzzle posed by the Consolidated and Separate Financial Statements for last year of the Central Bank of Nigeria, with regards to a debt of $15 billion said to be owed to two international banks, another puzzle, probably as disturbing, emerged.
According to JP Morgan, a leading American investment bank, Nigeria’s foreign reserves, put by the central bank at $37.4bn as of year-end 2022, were probably substantially less. In fact, it is as low as just $3.7bn. If this were the true position, then Nigeria, an import-dependent country, would have problems with imports. At this level of reserves, the import cover would fall short of the required minimum.
JP Morgan said it based its figures on assumptions, and noted that the $3.7bn reserves position would hold if those assumptions are true. “In arriving at said estimate we make a few assumptions which if incorrect would substantially change the picture,” the bank said.
It assumed the addition of $5.0bn in IMF Special Drawing Rights (SDR) to external reserves to arrive at total gross foreign exchange reserves of US$37.8bn. This, it explained, is in line with the 30-day moving average of US$37.08bn earlier published on the central bank’s website. From this, it subtracted the sum of three figures: foreign exchange forwards of $6.84bn); securities lending amounting to $5.5bn, and currency swaps of $21.3bn), giving a total liability of $33.7bn and therefore a net balance of $3.7bn.
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The repercussions of such a paltry amount of reserves would be serious, the bank noted. “The lower net foreign exchange reserves also “reduces the willingness to introduce a flexible exchange rate regime in the near term,” JP Morgan noted.
However, the CBN has dismissed the report by JP Morgan, describing it as being “out of context”.
“We also read the JP Morgan numbers in-house and we didn’t panic over that. That’s not the first time we are seeing people, institutions reeling out numbers: they must have their intentions to do that, whether to rouse market sentiments, whether to mislead the public,” Dr Hassan Mahmud, director of the monetary policy department of the CBN, explained. He spoke on a programme on Africa Independent Television (AIT) on Wednesday.
“But the central bank has tried as much as possible to be transparent. What I will say about those numbers is that it is just funny in the sense that number one, reserves like any account balance, is a flow; there are changes that go within it at any particular time,” Mahmud added.
What is the correlation between the net foreign exchange reserves calculated by JP Morgan, and the financial position as presented by the CBN in its financials?
The revelation by the Central Bank of Nigeria that it is indebted to two international banks to the tune of $15bn has stirred controversy, doubt and questions. These have arisen because of the uncommon nature of the entries in the bank’s statement, and the timing of the release of the bank’s reports.
According to the report, the loan was taken over two years ago – 2021 and 2022. Now the question is what did the bank do with the loan? Why was the reporting done in the format in which it was presented by the regulator?
In its report for the financial year ended December 31, 2022, the CBN introduced an entry in Notes 16A and 29A(vi) under the sub-title of Securities Lending on pages 112 and 166.
According to the report, the group said it entered into a securities lending agreement with Goldman Sachs and JP Morgan, two leading American investment banks.
As part of the agreement, the Central Bank Group received cash in exchange for its securities to be held by the banks as collateral for the loan. “
“JP Morgan being the global custodian of the securities of the group holds an equivalent in securities, of value of loan given in cash,” CBN explained in the report.
“The cash received from Goldman Sachs is N0.23 trillion ($500 million), 2021: N0.22 trillion ($500 million) and JP Morgan N3.23 trillion ($7 billion), 2021: N3.05 trillion ($7 billion) is recognised in other foreign securities (see note 16f),” the central bank explained.
The group comprises the CBN and its subsidiaries including the Nigerian Security Printing & Minting Plc (MINT), and Nigerian Electricity Supply Industry Stabilisation Strategy Limited (NESI SS Ltd), among others.
In simple terms, the central bank borrowed money against the nation’s foreign reserves, while still carrying the amount on the books.
“From the financials, what CBN has taken is $7.5bn. This money was taken as part of securities trading. What the CBN did was ‘We have money with you, but we don’t want to collect money with you; give us cash against that money with you so that we can use it to do what we want to do,” says Dr. Emeka Ucheaga, CEO of EUA Intelligence, Lagos.
“What happens on your financials in that kind of situation is that for example, if you had $7.5bn with you (JP Morgan and Goldman), you say ‘I don’t want to collect that money, give me another money against that money’.”
The book entry of the transaction would raise the central bank’s assets by another $7.5bn because it now has the loan amount as cash and still has its own cash. But the liability side will also increase by $7.5bn, leaving the bank’s financial position unchanged.
“But what will happen to your external reserves is that your cash position has now increased. Now it will appear as if you have $15 billion (the $7.5b+$7.5bn overdraft),” Ucheaga explained.
Nigerians have reacted with mixed feelings to CBN’s disclosure that it borrowed from the international banks. What did the central bank do with such a loan?
Most analysts believe CBN used the loan amount to support the naira on the foreign exchange market.
One of them is Dr Muda Yusuf, director at the Lagos-based Centre for Promotion of Private Enterprise. “I know that because the reserves were also in a desperate position, and he was under pressure to protect the naira,” he said, referring to Godwin Emefiele, the suspended governor of the CBN.
And for Ezeaga: “What CBN most likely would do with that money, if they were interested in defending its currency, is that they would have converted that $7.5bn to naira over a period of time to stabilise their currency.”
The defence of the naira by the central bank at the foreign exchange market has been a contentious issue. In 2022, Bismarck Rewane, Managing Director of Financial Derivatives Company Ltd, had predicted that the CBN could spend between $8bn and $10bn to defend the naira that year.
The amount spent defending the naira at each point in time always depends on the tempo of the market. For instance, figures indicate that between January and July 2021, CBN spent $2.1bn propping up the local currency; over the same period in 2019, the amount spent defending the local currency was $1.43bn.
In the two months of December 2021 and January 2022, the bank spent a total of $3.36bn supporting the naira, as follows: $1.71bn and $1.65bn, for the two months respectively.
The free fall of the naira since it was floated by the central bank in June, analysts say, is evident that the CBN had actually been propping up the local currency.
“From what we are seeing now, we can see that he (Emefiele) was actually defending the naira. You can see the naira…now that we are not defending it as much as he was doing then,” says Yusuf.
Since its flotation, the naira has slumped in value. Not even the threats from the central bank have been able to protect it significantly, apart from a momentary reprieve.
When the currency crossed the N900/$ rate at the parallel market and deep into the N700/$ on the I&E window (now renamed Nigerian Foreign Exchange Market), the central bank reeled out a list of measures aimed at halting the haemorrhage. That worked for a few days, as the currency gained against the dollar at the parallel market.
But panicky measures do not fool the markets for long. Yes, the market, in its characteristic way of “Act first, think later” responded to those threats from the central bank, leading to the gains by the naira in both markets. However, the JP Morgan statement provided a superior argument for the market. Based on their assumption, Nigeria’s foreign reserves, for now, could be as low as $3.7bn.
But this is probably not the end of the matter. “If we subtract the $7.5bn which can be validated from the CBN financials, the net position is $26.3bn, which is still a fair position to be at as it provides an adequate import cover of more than six months,” says Ezeaga. Should the actual reserves be $3.7bn, Nigeria is in a critical situation.
However, it is only when the external reserves are stress-tested in the nature that JP Morgan has used their very conservative assumptions that you arrive at a $3bn net external reserves.
The market chose to believe the JP Morgan report, which explains the renewed depreciation of the naira. By Wednesday, August 23, and Thursday, August 24, a dollar was exchanged for N907 at the black market in Lagos, according to available figures.
Why did it take the CBN so long to speak on the matter? “It is ridicule for us (CBN) to come to the public domain, whether the CBN governor or deputy governor to speak on issues by JP Morgan. I don’t even know who said it in JP Morgan,” Mahmud said.
Ucheaga has a different idea on this: “The biggest part of central banking is controlling the narrative and controlling the picture.” He spoke to Daily Trust before Mahmud’s TV appearance.
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