CBN – According to Fitch Ratings, the Central Bank of Nigeria’s currency swaps with domestic banks amounted to an estimated $10 billion to $12 billion by the end of 2022.
This figure represents approximately 30% of Nigeria’s gross reserves, which stood at $37 billion at the close of 2022.
These currency swaps encompass transactions with both domestic and international counterparts, highlighting potential vulnerabilities in the country’s net reserve position and underscoring external risks.
Fitch report on Nigeria’s reserves and currency swaps
Fitch’s report, titled ‘Nigeria’s weaker reserves highlight external risk and policy challenges,’ was released following the recent publication of the Central Bank of Nigeria’s financial statements.
The report suggests that the central bank’s swaps with domestic banks are likely to persist at a similar level, with many of these swaps being rolled over.
This is due to incentives for banks to invest received naira in high-yield sovereign securities and the limited reliance on swaps for foreign-currency liquidity, thanks to significant foreign-currency deposits with international banks.
The publication of the central bank’s consolidated financial statements for the first time in years revealed substantial liabilities, increasing transparency around Nigeria’s reserves.
However, important gaps still exist, preventing a comprehensive assessment of the net reserve position.
Fitch had previously estimated that approximately 30% of Nigeria’s gross reserves consisted of swaps with domestic banks.
The financial statements disclosed liabilities that included $7.5 billion in securities lending, $5.5 billion of which were short-term, and $6.8 billion in short-term liabilities from foreign-currency forward payables.
An additional $32 billion in “FX forwards, OTC futures, and currency swaps” were recorded as off-balance-sheet commitments, but the breakdown was not provided.
This category may include non-deliverable contracts settled in naira, which would not deplete reserves, as well as commitments with longer tenors.
Fitch noted that while recent exchange-rate liberalization and improvements in the monetary policy framework could benefit Nigeria’s credit profile by easing foreign-currency supply constraints, a loss of reform momentum and the constrained reserve position presented significant challenges to these policy adjustments.