Fitch Ratings has conducted an estimate of the Central Bank of Nigeria’s (CBN) currency swaps with domestic banks, suggesting that these swaps amounted to approximately $10 billion to $12 billion as of the end of 2022. This estimation accounts for roughly 30% of Nigeria’s gross reserves, which were approximately $37 billion at the end of 2022. These swaps encompass arrangements with both domestic and international banks.
Fitch’s report, titled ‘Nigeria’s weaker reserves highlight external risk and policy challenges,’ was prompted by the release of the CBN’s financial statements, marking the first time in several years that consolidated financial statements had been published. According to Fitch, these statements revealed potential weaknesses in Nigeria’s net reserve position, driven by significant liabilities, thus accentuating the country’s external vulnerabilities.
The report also stated, “Fitch estimates, partly based on our survey data, that CBN swaps with domestic banks were $10 billion – $12 billion at end-2022, and are likely to remain close to that level, but there is less visibility on swaps it may have with international counterparties.” Fitch expects that most of the domestic swaps will continue to be rolled over because banks have incentives to invest the naira they receive in high-yielding sovereign securities, and the banking sector relies less on swaps for foreign-currency liquidity due to its substantial foreign-currency placements with international banks.
Fitch pointed out that while the CBN’s financial statements provided increased transparency regarding Nigeria’s reserves, there were still significant gaps that hindered a reliable assessment of the net reserve position. This information is important for assessing the country’s overall financial health.
In addition to the estimated $10 billion to $12 billion in domestic swaps, Fitch highlighted other liabilities, including $7.5 billion in securities lending (with $5.5 billion being short-term) and $6.8 billion in short-term liabilities from foreign-currency forward payables. Uncertainty also surrounds nearly $32 billion classified as “FX forwards, OTC futures, and currency swaps,” which are recorded as off-balance-sheet commitments and not broken down.
Fitch acknowledged that Nigeria’s recent exchange-rate liberalization and improvements in the monetary policy framework could potentially strengthen the country’s credit profile by alleviating foreign-currency supply constraints. However, it cautioned that the loss of reform momentum and the constrained reserve position pose significant challenges to these policy adjustments.
It’s worth noting that JP Morgan had previously estimated Nigeria’s total currency swaps at $21.3 billion as of the end of 2022, indicating ongoing pressures on the foreign exchange market due to slow net FX reserves.
The CBN responded to these estimates by emphasizing that the central bank’s reserve figures are available and transparent, although they may not match external estimates to the last decimal point. The CBN cited a reserve total of $33 billion, which includes an IMF facility, SDR holdings, JP Morgan’s estimates, forward contracts, and other components. This clarification aims to provide a comprehensive view of Nigeria’s reserve position.