Home Money IMF SDR allocation: Direct allocation of US$3.3bn would boost Nigeria’s reserves by...

IMF SDR allocation: Direct allocation of US$3.3bn would boost Nigeria’s reserves by 10%-EFG Hermes

Godwin Emefiele, Governor of the Central Bank of Nigeria

MON 28 JUNE, 2021-theGBJournal- Following the International Monetary Fund’s (IMF) efforts last year to boost its capacity for emergency funding and leading negotiations for debt relief with the G20, it now aims to complement such efforts with an additional tool: SDR allocations.

Galvanising the equivalent of USD650bn in direct SDR allocations, the IMF intends to provide a boost to countries’ resources to help narrow external funding gaps and increase reserves.

The tool is nearly a free lunch, with the allocation granted with no strings attached and without increasing member countries’ debt burden. The allocation would be the largest in history, dwarfing the USD250bn undertaken during the global financial crisis in 2009. The funds would be allocated based on each member’s quota in the IMF, with member countries preserving the option either to keep them as SDR or convert them into one of the five leading global currencies (dollars, euros, yen, yuan or sterling); hence, they should provide some boost to developing countries suffering from external funding gaps and pressure on reserves.

EFG Hermes sees Nigeria as the largest relative winner within their coverage universe from the SDR allocation.

‘’A direct allocation of USD3.3bn would boost reserves by c10%. This, in addition to a planned minimum USD3bn Eurobond issuance in the coming few weeks, could boost reserves by c20% to +USD40bn by end of summer,’’ EFG Hermes said in a recent note seen by theGBJournal.

Such a boost would complement high oil prices to improve the country’s FX position, though this remains contingent upon further Naira adjustment.

The Central Bank of Nigeria (CBN) has recently taken a relatively symbolic move to unify exchange rates, possessing the ammunition to ease FX shortages later this summer would encourage further Naira weakness (we maintain a target of NGN430), together with further upward adjustment in domestic market rates.

‘’We would turn way more bullish if Nigeria benefited from on-lending, but we see it as unlikely that this administration would engage in an IMF programme of any sort,’’ the Frontier analysts said.

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