Inflation to reach 28% by year end ― JP Morgan

JP Morgan, a global service firm, has stated that Nigeria’s FX Reserve is likely to hover around $3.7 billion at the end of 2022, much lower than reported figures of about $30 billion.

The bank also predicts headline inflation to reach 28 per cent by the end of the year due to rising food prices and other impacts of President Bola Tinubu’s economic reforms.

According to JP Morgan in its latest report on Nigeria titled “Nigeria: Reform pause rather than fatigue”, the lower-than-reported FX reserve results from larger currency swaps and borrowings against the FX reserve.

It stated, “Based on partial information from the audited financial accounts, we estimate that CBN’s net FX reserves were around $3.7 billion at the end of last year, from US$14.0 billion at the end-2021.”

However, the bank clarified that it arrived at $3.7 billion by making some assumptions which if incorrect will change the figure in their estimates.

It explained, “An addition of US$5.0 billion in the International Monetary Fund (IMF) Special Drawing Rights (SDR) to external reserves arrived at total gross FX reserves of US$37.8 billion, broadly in line with the 30-day moving average of US$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 (US$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.”

The report noted that the Central Bank of Nigeria (CBN) still can withstand the pressure accompanying the low FX reserve, especially, as profit from swap arrangements between the CBN and commercial banks, rates will continue to increase.

The Nigerian National Petroleum Company Limited (NNPCL), borrowing $3 billion from the Afrexim bank to shore up the nation’s FX reserve, is expected to ease liquidity in the exchange market.

Nigeria’s FX reserve stood at $34.1 billion as of June 2023; hence JP Morgan’s estimate is a shock to industry watchers.

The report also noted it remained cautiously optimistic despite the recent stall in reform momentum.

President Bola Tinubu has had to slow down on major reforms, especially the fuel subsidy removal, despite a quick start to his administration, as the President last week said petrol prices would not increase, which negates the principles of a deregulated market.

The President’s statement reportedly sent panic to investors in the financial market as investors pulled out investments in Nigerian bonds on fears that the administration would return to the fuel subsidy era.

This might have led to the Nigerian sovereign bonds declining by 2.5-5 basis points across the curve in the wake of the current presidential policy statements.

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