The clearing of foreign portfolio investors’ funds that have been trapped in Nigeria for months on the back of foreign exchange scarcity is putting downward pressure on the country’s external reserves.
The International Monetary Fund had in February 2021 said there was an estimated $2bn backlog of requests for forex from the divestment of naira assets by foreign portfolio investors.
Financial experts have attributed the recent decline in the external reserves to the gradual clearing of the forex backlog by the Central Bank of Nigeria.
The external reserves have been fluctuating in recent months, rising from a low of $34.42bn on March 18 to $35.25bn on April 16 but dropped to $34.51bn on May 14, according to CBN data.
“The external reserves rose steadily above $35bn on higher oil proceeds and improved remittances. But started to decline as CBN began clearing its $2bn backlog to FPIs,” the Managing Director/Chief Executive Officer, Financial Derivatives Company Limited, said.
He said the CBN sold $1.47bn forex to authorised dealers in January this year, down by 64 per cent from the $4.1bn sold in January 2020.
He added that the dollar sales to FPIs would ease forex demand pressures in the country.
The Managing Director/Chief Executive Officer, Cowry Asset Management Limited, Mr Johnson Chukwu, said, “The CBN is managing the reserves; so, the CBN does not want to be very bullish or adopt a one-fell-swoop approach in clearing the backlog, given the impact it will have on the reserves.
“The gradual depletion in the reserves is obviously coming from payments of the backlog. It’s a programmed liquidation of the arrears due to foreign investors.”
According to him, when foreign investors are trapped in any economy as a result of forex scarcity, their appetite to invest in the country will be dampened.
Chukwu said, “You will likely see that investors will be very slow in coming back to that market; this is part of what we are witnessing because investors will bid their time until the arrears are fully cleared. We might not see an aggressive re-entry of foreign portfolio investors into the economy.
“Until the arrears are cleared, you are not likely going to see a very bullish interest by foreign portfolio investors in the local currency instrument.”
The IMF had at the end of its 2020 Article IV consultation with Nigeria said the private sector reported significant forex shortages, which were being met by a combination of delayed payments, use of own forex funds and purchases in the parallel market.
It noted that in October 2019, the CBN adopted a policy prohibiting domestic nonbank institutional investors from reinvesting in Open Market Operations bills.
The fund said capital outflow risks remained considerable with record-low interest rates and still sizable foreign holdings of short-term OMO bills.
“To instill confidence, a unified exchange rate with greater flexibility is imperative. Exchange rate rigidity and uncertainties regarding FX access have put the burden of adjustment disproportionately on the real economy,” it said.
The IMF recommended a multi-step approach to establishing a market-clearing exchange rate, with the near-term focus on allowing for greater flexibility in the rate and removing the forex backlog.