RAYS OF HOPE AMIDST THE FX CRISIS

• Foreign reserves hit a new low

• The Naira is strengthening

Nigeria's forex reserves continue to be under fallout from its prior approach to managing its FX reserves and worries over recent changes to forex rules.

This past weekend, the amount of FX reserves fell to $33.23 billion, the lowest level since July 2021.

But the naira persisted, climbing 1.8% to complete the weekend at N741.85 per dollar at the official I & E Window.

Following the National Bureau of Statistics (NBS) report for the second quarter of 2023, which showed that Nigeria's total capital imports decreased by 9% to $1 billion in the second quarter of 2023 from the first quarter of 2023, came the most recent FX report.

By following banking transactions and Customs data, capital importation keeps track of all inflows of money from outside, including credit, deposits, and physical capital.

According to economists, local savings, worker remittances, and foreign capital are the main sources of funding for long-term economic growth. Therefore, capital importation determining how an economy is seen by foreign investors.

According to the NBS research, foreign portfolio investments (FPIs) fell by 83.5% from the first quarter of 2023 to $106.9 million in the second quarter. This was the $4.3 billion reported in the second quarter of COVID-19.

However, ongoing changes will alleviate the forex situation and revitalize currency management.

In its most recent report, Financial Derivatives Company's (FDC) Managing Director, Mr. Bismarck Rewane, states that while there may not be a noticeable appreciation of the naira until next year, there is optimism that President Bola Tinubu's pro-market administration and the Central Bank of Nigeria's (CBN) new leadership will gradually improve the situation.

He asserts that the economy is struggling and there is skyrocketing inflation.

Despite published data showing a position of $33.23 billion in gross external reserves on a 30-day moving average basis, the backlog of unresolved forward contracts is estimated to be $6.8 billion, and airline-trapped funds total about $800 million, he said. Nigeria's gross external reserves a source of debate.

Our naira's purchasing power parity (PPP) value is N735.53 per dollar, or almost 27 percent more than the parallel market rate, is perplexing. The naira is undervalued by 1.3% rather than overvalued.

While some economists have questioned the reason and rationality of our methodology, the PPP analysis as of September 30 reveals that. If and only if Nigeria is honest about reserves, minus its debts to the market, we think the naira will strengthen to N900 per dollar before December.

However, we don't anticipate any real naira appreciation until 2024. The background of the new CBN leadership gives us hope that they will stop doing stupid things. However, while vital, they are insufficient to stop the deterioration. After the World Bank meetings in Morocco, we are sure that Nigeria would approach the markets to renegotiate its inefficiently structured foreign debt and discuss policy support with the International Monetary Fund (IMF). Why take on more debt when you are already drowning in it, some people may wonder.

“The answer is simply that mismanaged debts and liabilities with no show need to be followed by project-specific borrowing and proper governance going forward,” Rewane said, in a weekend assessment.

Mr. Wale Edun, Minister of Finance and Coordinating Minister for the Economy, has indicated that the nation was working with the World Bank to find the most lenient measures to facilitate the resolution of the FX problem.

Afrinvest analysts predicted that, should external conditions align favorably before reform fatigue sets in, the Federal Government's efforts to develop bilateral and multilateral commercial ties as well as its attempts to enact some market reforms will inspire confidence.

In order to offer a convincing case for the naira, analysts said that it would be beneficial to support short-term measures like the $3 billion Afreximbank-NNPCL agreement with gradual increases in market yields and inflation-arresting policies.

According to Afrinvest, longer-term policies should concentrate on transitioning the economy away from being hot-money dependent and toward one that is built on foreign direct investment (FDI).

However, Afrinvest reduced its forecast for capital imports for the year from $6.2 billion to $4.8 billion, noting the lack of foreign exchange liquidity, persistent inflation, the need for tougher CBN direction, and the growth of yields in advanced markets.

As a result of the fact that only five of the 36 states and the Federal Capital Territory (FCT) attracted foreign investment flows in the second quarter of 2023, compared to nine states in the first quarter, analysts also noted the need for improvements in the attractiveness of the sub-nationals to improve foreign inflows.

Due to what Cordros Capital described as a perceived slowdown in the momentum of the FX reform, the stories in the forex market have stayed consistent in recent weeks.

As a result, Cordros Capital remarked, “we expect forex liquidity constraints to persist in the coming months, ensuring the local currency pressures remain intact.”