Fitch Ratings has estimated the Central Bank of Nigeria’s currency swaps with domestic banks to be between $10bn and $12bn as of the end of 2022.

It stated that this was 30 per cent of the country’s gross reserves (at $37bn as of 2022’s end), and comprised swaps with domestic banks, and others.

According to the international rating agency, this suggested that the country’s net reserve position may be weaker than anticipated, and emphasised its external vulnerabilities.

It disclosed this in a report titled, ‘Nigeria’s weaker reserves highlight external risk and policy challenges’, following the recent publication of the CBN’s financial statements.

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The report added that, “Fitch estimates, partly based on our survey data, that CBN swaps with domestic banks were $10bn – $12bn at end-2022, and are likely to remain close to that level, but there is less visibility on swaps it may have with international counterparties.

“We anticipate that most of these domestic swaps will continue to be rolled over, reflecting incentives for banks to invest the naira received in high-yielding sovereign securities and the sector’s limited reliance on swaps for foreign-currency liquidity given its sizeable foreign-currency placements with international banks.”

It said the recent publication of consolidated financial statements to end-2022 by the CBN, the first for many years, suggested the net reserve position may be weaker than we had anticipated. The statements, which confirmed sizeable liabilities, increased transparency around Nigeria’s reserves, but important gaps remained, preventing a reliable assessment of the net reserve position.

Fitch said, “When we affirmed Nigeria’s rating at ‘B-’ with a Stable Outlook in May, we stated that external finances were a key rating sensitivity. We estimated that around 30 per cent of Nigeria’s gross reserves (which were $37bn at end-2022) comprised swaps with domestic banks, although we considered that some other reserves could well be encumbered.”

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The credit rating agency highlighted that the CBN financial statements indicated that liabilities as of the end of 2022 included $7.5bn securities lending ($5.5bn of which was short term), and $6.8bn short-term liability from foreign-currency forward payables.

It stated that uncertainty surrounded the near $32bn of “FX forwards, OTC futures, and currency swaps”, which were recorded as an off-balance-sheet commitment but are not broken down.

It noted that this could include some non-deliverable contracts settled in naira, which would not be a drain on reserves, as well as commitments of a longer tenor.

Fitch said the recent exchange-rate liberalisation and improvements in the overall monetary policy framework could strengthen the country’s credit profile by easing foreign-currency supply constraints, but a recent loss of reform momentum and the constrained reserve position highlighted the significant challenges these policy adjustments faced.

It noted that the reserve disclosures offset more positive recent developments for Nigeria’s credit profile.

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Recently, JP Morgan disclosed that the country’s total currency swaps stood at $21.3bn as of the end of 2022. It stated that the slow net FX reserves meant continued FX market pressures.

The Central Bank of Nigeria also recently faulted a recent estimation of the country’s foreign reserves by JP Morgan saying it was presented out of context.

Making clarification on the estimation of Nigeria’s reserves, the Director of Monetary Policy Department, CBN, Hassan Mahmud, noted, “We have the numbers there. The central bank’s reserves are on our bank net. Yes, the figure you see today may not be exactly to the last decimal point, but you have that picture that you are seeing there.”

He added, “We have $33bn, there is an IMF facility there, the SDR is also there, we have the JP Morgan numbers that you mentioned, we have forwards, they are all there.”

PUNCH