Auditor reveals over-reporting of Nigeria’s foreign reserves

More than 40% of foreign reserves held by the Central Bank of Nigeria (CBN), about US$34bn in early August, are encumbered assets, according to the CBN’s audited financial statement for 2022. The report was published in early August 2023 and is the CBN’s first since 2015. Using the equivalent amount of securities in its foreign-exchange reserves as collateral, as of end-2022 the CBN had borrowed US$7.5bn from overseas banks and owed more than US$7bn as a counterparty in foreign-exchange forwards. In total, US$14.7bn of the CBN’s foreign reserves are claimed in some form.

Nigeria’s foreign-exchange reserves, officially reported as equivalent to 7.8 months of imports, are an important cushion against external payment risks. Based on imports for the first quarter of 2023, the “actual” stock of foreign reserves is equivalent to only 4.5 months of imports. The long gap in the CBN’s financial auditing corresponds to the tenure of Godwin Emefiele. He was suspended as governor in June by the president, Bola Tinubu, to make way for a special investigator to examine the CBN’s books.

When, in June, the CBN’s interim governor, Folashodun Shonubi, who was appointed by Mr Tinubu in the same month, unified the exchange-rate regime (following which the naira depreciated by 63% against the US dollar), the goal was that liquidity conditions would improve as the naira became more market-determined. However, the CBN failed to clear a large backlog of foreign-exchange orders (valued in the billions of US dollars by some estimates) ahead of the convergence, undermining foreign investor confidence in the new currency regime, and encumbered foreign reserves help to explain why. 

As the CBN is unwilling to address high inflation and the root causes of currency losses, a reversion to heavier exchange-rate management remains the baseline scenario as popular pressure mounts on the CBN to stabilise the currency. However, this assumption has partly been based on there being enough foreign reserves to do so. With import cover being closer to 4.5 months, the risk of convertibility restrictions being imposed to control the exchange rate is consequently higher. A more managed exchange-rate regime would in any case be more unstable, and prone to regular devaluations.

Conversely, an upside scenario in which market illiquidity forces the CBN to adopt a fully floating exchange rate is now a more serious possibility. This would require scrapping various restrictions on an array of imports, a policy that concerns investors but will be difficult for Mr Tinubu to abolish for political reasons. There is also little guarantee that foreign-exchange inflows would increase, given that many of the causes of market illiquidity would still apply.

The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.