Gross External Reserves Increased by USD64m to USD39.2bn in July 2022

By FBNQuest Analysts

Our chart today, drawn from data from the CBN shows that Nigeria’s gross external reserves increased marginally by $64m to $39.2bn in July.

The rise is the second in a row and follows a more substantial increase of $672m in June. The CBN does not provide a timely explanation on the drivers of the external reserves.

In the face of dwindling fx inflow from crude oil due to the oil sector’s low productivity, flight to quality by portfolio investors away from emerging markets, and non-issuance of external debt, our educated guess on the likely sources of the increase are non-oil exports and diaspora remittances.

Total reserves as at end-July covered 9.1 months of merchandise imports based on the balance of payments for the 12 months to March 2022, and 7.1 months when we add services. We consider this a healthy buffer.

However, for a more accurate picture, we must adjust the gross reserve figure (and the import cover) for the pipeline of delayed external payments, which is estimated at $1.7bn by the World Bank.

Although the chart below shows that Nigeria’s FX reserves have been declining recently, Egypt’s FX reserves have been declining even more rapidly.

For Egypt, debt service costs totalling $2bn (including coupons for Eurobonds and principal and interest payments to the IMF) were largely responsible for the sharp fall in the reserves.

Other factors include the impact of shocks to the external environment, brought on by the Russian-Ukraine conflict, which led to a higher import bill (due to rising commodity prices), the large-scale exit of portfolio investors, and a decline in fx inflow from the tourism sector, of which Russian and Ukraine tourists made up a sizable portion.

By way of comparison, Egypt’s $33.1bn worth of FX reserves as at end-June, were sufficient to cover 5 months of merchandise imports, much less than the 9.1 months cover for Nigeria.

There is, however, a case to be made that if the CBN’s demand management measures had not repressed FX demand, Nigeria’s FX reserves (and import cover) may have been much lower.

As seen in our chart below, South Africa’s international liquidity position (inc. gold and adjustments for FX deposits and forward swaps) stood at $53.8bn. Its year-to-date decline of -2.8%, compares with -3.2% for Nigeria but is much better than the -19.0% for Egypt.

Article Released on Friday, August 12, 2022.