JP Morgan’s report on reserve ”Out of Context” says CBN

The Central Bank of Nigeria (CBN) has said the recent estimate of the country’s net external reserves by JP Morgan was “out of context”, and assured that there was no cause for panic.

Recall that the American investment bank said it estimated the value of Nigeria’s FX reserves at $3.7 billion against the $33.8 billion published by the apex bank.

Speaking on Money Line, a programme aired on Africa Independent Television (AIT), the Director of the Monetary Policy Department of CBN, Mr. Hassan Mahmud, said that fluctuations and liabilities encumbrances to the reserves were only natural and normal, adding that the apex bank built the reserves to defend the naira in terms of its value to other currencies.

He questioned the real intent of the report by the rating agency, saying, “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.

Mr. Mahmud also disclosed that the CBN owned about 80 percent of funds in reserves, mainly to support the local currency in periods of volatility as well as boost the 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 have seen people and institutions reeling out numbers; they must have their intentions to do that, whether to rouse market sentiments or 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 owe 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.”

Mr. 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 attached 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 percent of the reserves are 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 monetizes that in naira, and the federal government spends the naira on 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 the 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 imports and exports. Two, in the event that, for example, we have 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.”

Mr. 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 a short period of time.

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

“So, the reserves are tools we can comfortably use to build investors’ confidence in the Nigerian economy and also build 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 amortize those loans.”

He stressed, “If you come today and sum up the entire facility, maybe $20 billion, and you say the federal government owes $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; the 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.”
See also Naira depreciates to N1089/$ on official I&E window

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