CBN Questions JP Morgan’s $3.7bn Estimate of Net Reserves, Faults Claim

The Central Bank of Nigeria has faulted the recent $3.7bn estimate of the bank’s financial accounts by JP Morgan, saying it was “out of context”, and assured that there was no cause for panic.

CBN clarified that fluctuations and liabilities encumbrances to the reserves were only natural and normal, adding that the CBN built the reserves to defend the naira in terms of its value to other currencies.

Director, Monetary Policy Department of CBN, Dr. Hassan Mahmud, gave the clarification on “Money Line”, a programme monitored on Africa Independent Television.

Mahmud questioned the real intent of the report by the ratings agency, “whether to rouse market sentiments, or whether to mislead the public?”

He stressed that the apex bank had tried as much as possible to be transparent in its operations.

Mahmud also disclosed that CBN owned about 80 per cent of funds in reserves mainly to support the local currency in periods of volatility as well as boost confidence of foreign investors, among others.

He stated, “We also read the JP Morgan numbers in-house and we didn’t panic over that. That’s not the first time we are seeing people, institutions reeling out numbers; they must have their intentions to do that, whether to rouse market sentiments, whether to mislead the public.

“But, the central bank has as much as possible tried to be transparent. What I will say about those numbers is that it is just funny in the sense that number one, reserves like any account balance, is a flow; there are changes that go within it at any particular time.

“Two, even if you have outstanding liabilities, you don’t mark the outstanding liabilities to market on a day and say this is your net balance.

“I can have $20 million in my account and I am owing someone maybe $13 million that is supposed to be paid in 2027; you can’t come in 2023 and say if I remove that $13 million, your money is $7 million or you are having $7 million.

“Now, I am not having $7 million, I am having $20 million. Because before I took a facility of $13 million, I know in the next three years, I will get $17 million so I can pay you back.”

Mahmud added, “But for you to come and tell me that no, your balance is $7 million and you can’t pay back in three years; it’s just putting it out of context.

“Yes, there are liabilities encumbrances to the reserves, which is normal. The CBN built the reserves to defend the naira in terms of its value to other currencies and close to 80 per cent of the reserves is CBN’s funds.”

The CBN director also said, “When the federal government or the oil export receipts come to Nigeria, it comes through the central bank. The CBN monetises that to naira and the federal government spends the naira in the implementation of its budget.

“So, that dollar component sits with the central bank and the purpose of the dollar component, one, is to build the confidence of the international community in the capability of central bank to meet its trade commitment and so you will see measurements around what months of imports either goods and services or goods only can your reserves cover?

“That gives some confidence to foreign investors trading with Nigerian investors in terms of import and export. Two, in the event that, for example, we are having a float-managed exchange rate regime – in the event that the value of your currency is significantly depreciating or appreciating or whatever direction it is going – the central bank has the firepower to intervene in the market such that you bring the price to your expected or optimal equilibrium rate.”

Mahmud further stated, “So, that is what the reserve is meant for – the reserve is not meant for just trading – in the event that there are also shortfalls in the build-up of those reserves, you can take a swap or other engagements that are legally allowed by the CBN Act over the short period of time.

“The exchange rate, like we mention several times, is also part of the tools to address price stability, including leading to inflation and all that.

“So, the reserves is a tool that we can comfortably use to build investors’ confidence in the Nigerian economy and also build the sovereign confidence in terms of our exposures to multilaterals the CBN is owing and service its debts.

“So, people do all those calculations. Okay, for example, we have some government loans that are for 10 years and there is annual service interest that you are supposed to pay to amortise those loans.”

He stressed, “If you come today and sum up the entire facility, maybe $20 billion and you say federal government is owing $20 billion for the past 10 years; if you remove that $20 billion from the $33 billion you have only N3 billion to service your debt, that’s wrong because there’s going to be inflows; federal government is going to earn some monies.

“I don’t know how they did their calculations and I don’t have any information about that, but we also saw those numbers that came out.”

JP Morgan recent estimate that the CBN’s Net FX reserves currently stood at about $3.7 billion, significantly lower than prior estimates, owing to larger-than-expected currency swaps and borrowing against existing reserves.

The report pointed out that based on partial information from the audited financial accounts, the apex bank’s net FX reserves were around $3.7 billion at the end of 2022, compared to $14 billion in 2021.

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

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

However, the ratings agency said low net FX reserves meant continued FX market pressures, adding, however, that the CBN still has the ability to source FX at commercial and semi-commercial rates.