Forex Scarcity May Worsen As Significant Portion Of Nigeria’s $33bn Reserves Encumbered By Securities Lending

The foreign exchange crisis currently being experienced in the Nigerian economy may linger for a longer time than expected going by the encumbered nature of Nigeria’s external reserves with the Central Bank of Nigeria, THE WHISTLER has learnt.

Details of the Audited Financial Accounts of the Central Bank of Nigeria for the year 2022 had revealed that the bank is indebted to JP Morgan, Goldman Sachs, and other liabilities.

The CBN Consolidated Financial Statements had shown that it owed JP Morgan, N3.2trn or $7bn and Goldman Sachs N0.23trn or $500m, while N3.1trn or $6.3 is owed as foreign currency forwards.

This is the first time the apex bank is releasing its Consolidated Financial Statements since 2016.

External reserves fell from N15.38trn in 2021 to N14.9trn in 2022, according to the accounts.

The securities lending agreement which was received in cash forms part of the apex bank’s external reserves of N14.9trn.

But speaking with THE WHISTLER on the development, Nigeria’s first Professor of Capital Market Studies, Uche Uwaleke said that while release of the financial statements will go a long way in boosting the confidence of investors in the Nigerian economy, it has further exposed the challenges faced by the apex bank in managing the country’s external reserves.

Uwaleke who is the President of the Association of Capital Market Academics told THE WHISTLER that it is now beyond speculation that much of the reserves are encumbered by securities lending and derivatives contracts entered into by the CBN.

Explaining the implications of the CBN decision to go into the Securities lending with JP Morgan, Uwaleke who is a former Finance Commissioner in Imo State said the current liquid external reserves of about $33 billion does not reflect the true liquidity position of reserves as a significant proportion has been tied down by these contracts.

He said, “Let me start by commending the present management of the CBN for publishing the financial reports of the Bank after so many years.

“This act will go a long way in boosting the confidence of investors in the Nigerian economy.

“It has brought to the fore the true picture of the country’s external reserves being managed by the CBN. It is now beyond speculation that much of the reserves are encumbered by Securities lending and derivatives contracts entered into by the CBN.

“Much as these contracts are legitimate, the resulting obligations from them put to question the justification for entering into these contracts in the first place and whether adequate safeguards were put in place at the time of entering into these contracts.

“Securities lending is the process of loaning securities to another party which effectively transfers ownership to the other party expected to provide collateral for them. In this instance both JP Morgan and Goldman Sachs were said to have provided cash in return.

“By implication, the current liquid external reserves of about $33 billion does not reflect the true liquidity position of reserves as a significant proportion has been tied down by these contracts. Little wonder the CBN’s ability to intervene in the forex market has been hampered.

“Following this disclosure, the current volatility in the forex market may linger for quite sometime, except the reserves witness substantial accretion from crude oil sales proceeds.”

The Central Bank of Nigeria’s recent Forex policy measures had allowed Naira to float at the Importers and Exporters window.

This had further put pressure on the exchange rate with the dollar exchange for about N950 at the parallel market.

ENDS