Nigeria’s foreign reserves to cross $40bn after Eurobond issuance

Nigeria's foreign reserves are expected to surpass $40 billion with the successful $4 billion Eurobond issuance this week, following a $3.3 billion Special Drawing Rights (SDR) allocation from the International Monetary Fund (IMF) last month. This influx of foreign exchange reserves presents a golden opportunity for the Central Bank of Nigeria (CBN) to address the persistent foreign exchange (FX) shortages that have plagued the country for nearly two years. Mohammed Bashar, Head of Macro Economy at EFG Hermes, emphasized the importance of leveraging this liquidity to bridge the FX gap and stabilize the currency market. He outlined three key steps that the CBN should take to capitalize on this opportunity. Firstly, pumping in liquidity to clear backlogs, adjusting the official exchange rate to around $440 to $450 per dollar, and implementing higher interest rates to attract portfolio flows and bolster reserves. While the potential sacrifice of growth due to higher interest rates remains a concern, Bashar believes that a moderate rate adjustment can strike a balance between economic stability and growth. The looming question of devaluation also weighs heavily on the CBN's decision-making process. Bashar advocates for a controlled devaluation to address the pricing mismatch in the FX market and correct market imbalances. He asserts that past devaluations point to the necessity of another adjustment to align the market dynamics. With the $7.5 billion injection from the Eurobond issuance and SDR allocation, the CBN has the financial muscle to steer the currency journey and manage the FX market effectively, setting a tone for stability and resilience in Nigeria's economic landscape.