External reserves data from the CBN, show that Nigeria’s gross official reserves declined by USD30m to USD37bn in Dec ‘22. As shown in our chart below, the trend in gross official reserves was downward through 2022. Cumulatively, the official reserves decreased by USD3.4bn through 2022. Foreign exchange (fx) inflow from crude oil sales, the main source of fx accretion to the official reserves was essentially non-existent last year. At a bankers’ forum in Nov ‘22, the CBN governor disclosed that fx inflow from crude oil sales to the fx reserves has consistently decreased from over USD3bn per month in 2014 to roughly nil lately.

Total reserves as at end-Dec ’22 covered 8.4 months of merchandise imports on the basis of the balance of payments for the 12 months to Jun ‘22, and 6.4 months when we add services.

However, for a more accurate picture, we must adjust the gross reserve figure (and the import cover) for the pipeline of delayed external payments.

Although the cover has deteriorated materially in recent months, it is still higher than the international benchmark of three months of import cover.

Despite the demand pressure on the naira exchange rate, the CBN was able to keep the naira relatively stable on the official market. This was mostly accomplished by means of fx supply rationing.

The naira lost just c.9% of its value against the US dollar last year, despite the US Federal Reserve's significant interest rate rises. This is in contrast to the performance of most other currencies around the world.

To put things in perspective, the Egyptian Pound depreciated by 36% against the US dollar, last year. The Ghanaian Cedi capitulated even more by over 60%.

Going forward, we expect that the downward pressure on the external reserves will result in a marked adjustment to the currency this year.

We see the gross official reserve balance at c.USD36bn by end-2023. The modest decrease relative to end-22 levels is mostly due to the gradual improvement in oil production following a step-up by the security agencies. The FG’s proposal to eliminate fuel subsidies by June ’23 will also be supportive.