Will Nigeria sustain foreign reserves inflow?

Nigeria has managed to sustain its foreign reserves at approximately $37 billion despite addressing a $7 billion FX backlog, securitizing the ways and means loan, and fulfilling other debt and FX demands. The question now is whether this can be maintained with improved FX inflow. Ayodeji Ebo, Managing Director of Optimus by Afrinvest, shed light on the efforts that have been put in place to boost the reserves. One of the key initiatives by the Central Bank of Nigeria (CBN) was to increase interest rates to attract Foreign Portfolio Investors (FPIs). This move resulted in a surge of inflows into the economy, particularly when the Naira experienced a devaluation. Additionally, the unification of FX for remittances has made the Naira more competitive, further enhancing inflows into the CBN. However, the sustainability of the reserves hinges significantly on enhancing exports. Current data indicates that only 2.4% of exports come from manufacturing and 5% from agriculture, highlighting untapped opportunities that could contribute to stability. The CBN Governor has emphasized the need to diversify the country's FX revenue base to ensure long-term sustainability. Despite the progress made so far, concerns remain about the adequacy of these efforts in addressing fundamental issues like export diversification. Ayodeji Ebo expressed doubt about the sustainability of the current growth trajectory, citing temporary sources of FX inflow like government-issued diaspora bonds. He stressed that the seasonal increase in imports toward the end of the year could exert more pressure on the FX market. While official exchange rates have shown some improvement, the parallel market still operates at a higher rate, indicating a widening gap. The CBN's interventions have aimed to manage this divergence, but the persistent high demand for FX poses challenges to the market equilibrium. Ebo suggested that increasing the frequency of auctions and addressing unproductive FX demands could help alleviate pressure on the Naira. Looking ahead, Ebo forecasted a potential depreciation of the Naira to around 1.750 to 1.8 against the dollar for the month of October. The outlook is contingent on supply levels and the presence of speculative activities. Any significant surge in speculation could lead to a faster devaluation of the currency. In conclusion, sustaining Nigeria's foreign reserves at $37 billion amidst ongoing FX efforts requires a comprehensive approach that addresses structural issues in the economy while fostering export growth and managing FX demands effectively.