CBN Running on Fumes as JPMorgan Estimates Net FX Reserves at Only $3.7bn

It appears the Central Bank of Nigeria (CBN) financial accounts have opened a can of worms as a United States largest lender JP Morgan Chase stated in a note to clients it estimates Nigeria’s net foreign exchange (FX) reserve at $3.7 billion.

That is significantly lower than prior estimates, owing to larger-than expected currency swaps and borrowing against existing reserves, according to analysts at JPMorgan Chase.

Nigeria’s gross external reserve has fallen by about $2.8 billion in the first half of 2023 as it continues to struggle with weak crude oil output and a lack of foreign investor participation in the capital market.

The external reserves opened the year at about $37 billion but have now dropped to about $34.1 billion as of June 2023.

Analysts say the CBN offbalance sheet swaps is where the issue lies and that number could be as high as $18-22 billion.

“And if you net off against the forex reserves as of Dec, the CBN might be running on fumes,” one analyst said.

JPMorgan Analysis

Based on partial information from the audited financial accounts, we estimate that CBN’s net FX reserves were around US$3.7bn at the end of last year, from US$14.0bn at end-2021.

In arriving at said estimate we make a few assumptions which if incorrect would substantially change the picture.

They include: (i) an addition of US$5.0bn in IMF Special Drawing Rights (SDR) to external reserves in order to arrive at total gross FX reserves of US$37.8bn, broadly in line with the 30-day moving average of US$37.08bn previously published on the central bank’s website; (ii) adjusting the gross external reserves with three key FX liability lines that include FX forwards (US$6.84bn), securities lending (US$5.5bn) and currency swaps (US$21.3bn); and (iii) estimating currency swaps by backing out FX forwards and outstanding OTC Futures balances from an overall aggregate published in the financial accounts.