We see from the chart below that Nigeria’s gross official reserves declined again by USD666m (-1.7% m/m) in December ’21 to close the year at USD40.52bn. This is in line with our expectation of a +/- USD40bn year-end balance and represents the reserves’ second consecutive month of decline following four months of successive increases. Last month’s decline reflected the deceleration in reserve inflows, following the IMF’s USD3.3bn SDR allocation and the FGN’s USD4bn Eurobond issuance. For a more accurate picture, we must adjust this gross figure for the pipeline of delayed external payments.
Total reserves at end-December covered 9.7 months’ merchandise imports based on the balance of payments for the 12 months to September ’21, and 7.3 months when we add services. We consider this a healthy buffer.
On the back of current economic realities of the US and the likelihood that the Fed could make significant policy decisions (such as rate hikes and balance sheet reduction) quicker than expected, the IMF on Monday warned emerging economies to prepare for possible disturbance of financial markets and a tightening of financial conditions globally. These developments, according to the Fund, could come with a slowing of US demand and trade and may lead to capital outflows and currency depreciation in emerging markets.
To strengthen policy frameworks and reduce vulnerabilities, the IMF recommended that emerging economies raise benchmark interest rates and allow their currencies depreciate. The timing of these is to be based on each country’s economic circumstance.
Nigeria’s oil production capacity remains a constrain to the country’s ability to reap the benefits of current levels of oil prices. OPEC data obtained from secondary sources show Nigeria’s oil output (excluding condensates) at c.1.42mbpd in November ’21.
In the light of the IMF’s concerns (which we share above), we see increased attrition on the official reserves this year, more so if oil prices decline because of increased supply, or the pandemic.