The Federal Government might generate up to $17 billion by reducing its shares in many joint-venture oil and gas assets, according to a projection by the US-based bank, JP Morgan. This estimate emerges as the Nigerian government strategizes to amplify its foreign exchange revenues and fortify its external reserves, aiming to alleviate forex strain.
In a report titled, *’Nigeria: Reform pause rather than fatigue (CBN’s financial accounts open a can of worms)’*, JP Morgan highlighted that the Central Bank of Nigeria’s (CBN) net FX reserves had plummeted to around $3.7 billion by the end of 2022, a sharp decline from the $14 billion recorded at the close of 2021.
The bank’s estimates are based on a few assumptions tied to IMF Special Drawing Rights, FX forwards, securities lending, and currency swaps. These assumptions are essential to deduce the actual net FX reserves, which if inaccurate, might significantly alter the overall perspective.
Despite the diminished forex reserves, JP Morgan indicated the CBN has avenues to acquire forex at various rates. The lucrative nature of currency swap arrangements between CBN and domestic banks will likely persist.
The government’s potential financial relief might come from selling its stakes in joint-venture oil and gas assets, which could accrue up to $17 billion, as recommended by the President’s policy advisory council. Furthermore, a $3 billion loan announced for NNPC may moderately enhance FX liquidity conditions.
However, JP Morgan cautioned about persistent forex pressures due to the vast external financing demands of the private sector. The US bank cited the structural balance of payments deficit and previously underestimated net FX reserves as challenges to transitioning to a more flexible exchange rate regime.
Short-term strategies might involve boosting oil output and tightening monetary policies, with the OMO auctions having recently resumed.
Discussing inflation, JP Morgan anticipates a surge to 28% by 2023’s end, primarily due to the removal of the petrol subsidy. This forecast surpasses the World Bank’s prediction of 25%. While inflation is expected to recede by early 2024, JP Morgan stresses the lingering inflationary pressures, especially from food costs.
The report further highlighted the impact of fuel subsidy removal, forex liquidity, and CBN’s financial data. Amid these challenges, the CBN adopted tighter monetary measures, hinting at the use of other tools instead of adjusting the MPR, which JP Morgan believes will remain at 18.75% for the year.