FX reserves under spotlight after apex bank’s disclosures 

By Sodiq Adelakun

The FX reserves, which give the central bank the firepower to defend the naira, have come under the spotlight, with some experts saying the exact value of foreign currency-denominated assets on reserve is far less than the figure on CBN’s website.

The disclosures in the financial statements recently released by the Central Bank of Nigeria have cast doubt on the value of the country’s foreign exchange reserves, whose continued decline has weakened the CBN’s ability to defend the naira.

The reserves stood at $33.88 billion as of August 10, down from $37.08 billion at the end of last year, according to data from the central bank.

Concerns over FX reserves come after the apex bank disclosed that it has large dollar deals with JP Morgan and Goldman Sachs in documents that also confirmed it broke limits on lending to the government.

“The revelations in the CBN report brought to the fore the true picture of the country’s external reserves. It is now beyond speculation that much of the reserves are encumbered by securities lending and derivatives contracts entered into by the CBN,” James Okweshine, a professor of economics at the University of Benin, said.

According to Okweshine, much as these contracts are legitimate, “The resulting obligations from them put to question the justification for entering into these contracts in the first place and whether adequate safeguards were put in place at the time of entering into these contracts.

“A look at the fundamental data reveals the existence of large imbalances in Nigeria’s external accounts occasioned by a mix of structural shifts and policy missteps by the CBN as the bane of the present FX woes,” Agora Policy, an Abuja-based think tank, said in its latest note.

The CBN said it “pledged its holding on foreign securities in return for cash” in a lending agreement with Goldman Sachs and J.P. Morgan.

“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 recognized in other foreign securities,” it said in its 2022 financial statements.

By implication, Uwaleke said the current liquid external reserves of about $33 billion do not reflect the true liquidity position of reserves as a significant proportion has been tied down by these contracts.

“Little wonder the CBN’s ability to intervene in the forex market has been hampered,” Okweshine said.