Macro dynamics leave CBN helpless as reserves drop $945m in 30 days

Business a.m.

In the face of ongoing pre-election activities Nigeria’s foreign exchange reserves have continued their free fall and it’s now at $38.48 billion despite the positive rally in the price of oil to about $115 per barrel. Nigeria’s weak oil production capacity and its low investment into the oil and gas industry have continued to be a setback to its receipt of foreign exchange inflows to grow its reserves in recent times.

Data obtained from the website of the Central Bank of Nigeria (CBN) on Friday shows that Nigeria’s foreign exchange reserves have shed over $945 million in value, dropping to $38.4 billion from $40.5 billion as at the start of the year. Analysts had projected with high optimism that the defunct macroeconomic environment at the start of the year plus the continued surge in oil prices in the international crude market above the country’s budget benchmark of $62 per barrel to around $90 per barrel will propel a significant accretion in the foreign asset holding under the watch of the CBN.

With liquidity squeeze in the money market leading to a rise in the repo and overnight rates and the unrelenting weakening of the local currency against the dollar in the foreign exchange market where the Naira now trades above N600 to a dollar in the street across major Nigerian cities, some analysts have noted that the continued pressure on the local currency without the timely and appropriate intervention by the apex bank will continue to hamper on the accretion of the external reserves.

Nigeria’s major source of foreign exchange earnings is crude oil. But the current rally in the price of oil since the Russo-Ukrainian impasse has remained bullish since February, which could be a boost to the accretion of the gross external reserves that have been dwindling against the CBN’s projection of a positive rise towards the $40 billion mark before the close of the second quarter. What is the outlook of the oil sector for Nigeria despite OPEC upgrading Nigeria’s daily production to 1.79 million barrels from the initial 1.77 million daily barrels?

Throwing more light on the above, the OPEC in a statement Thursday said it is setting a new target of 27,000 daily barrels higher than the approved quota in June for Nigeria and in line with its upward adjustments by OPEC+ of overall monthly production by 648,000 barrels daily for the month of July with a target production of 43.206 million barrels daily. Meanwhile, a survey by Reuters showed that Nigeria’s production output averaged 1.42 million barrels per day in May. The figure is 70,000 daily barrels higher than the average crude oil production in April, which stood at 1.35 million barrels per day.

According to the recent report from the National Bureau of Statistics (NBS) on the first-quarter real GDP, the oil sector contributed 6.63 percent to the total real GDP in Q1 2022, down from the figures recorded in the corresponding period of 2021 and up compared to the preceding quarter, where it contributed 9.25 percent and 5.19 percent respectively. However, it is majorly held in the belief that investment in oil and other booming sectors will help drive enhanced growth across the board in the economy, as well as lead to growth in the gross reserves.

As foreign investors continue expressing wariness about Nigeria’s macroeconomic dynamics, specifically the Central Bank of Nigeria’s (CBN) multi-tiered foreign exchange rates amidst rising FX backlogs, recent data obtained from the CBN in its monthly report for the month of January 2022 showed that the CBN had pumped in a total of $3.36 billion into the foreign exchange market in the last two months in a bid to safeguard the stability of the naira.

An assessment of the report on ‘Foreign Exchange Market Development’ revealed that the sum of $1.71 billion and $1.65 billion was pumped into the market in December 2021 and January 2022 respectively. Also, the report highlighted that the central bank’s sales of foreign exchange to investors through the Investors and Exporters and Secondary Market Intervention Sales windows fell by 13.7 percent and 16.3 percent to $0.58 billion and $0.54 billion, respectively, in the month under review.

Meanwhile, foreign exchange inflows into Nigeria have, over the years, been hampered by some inadequacies and uncertainties around the multi-tiered exchange rates of the apex bank which has, in turn, led to declines in diaspora remittances inflow, as well as foreign direct and foreign portfolio investments, respectively. Consequently, it is most glaring that Nigeria’s major sources of foreign exchange have become uncertain and have become prone to exogenous fluctuations of global economic developments in recent times.

Meanwhile, low foreign currency inflow continues to impact Naira as the local currency faces pressures arising from the demand for dollars and other primary currencies. This is seen in the recent capital importation report published by the National Bureau of Statistics that Nigeria recorded a 28.09 percent decline in the total capital inflow into Nigeria when it reported $1.57 billion in the first quarter of 2022, down from $1.91 billion in the last quarter of 2021.

Regardless of the alarming depletion of the gross dollar reserves and dwindling receipts from crude oil for Nigeria, the country continues to grapple with crude oil theft in the Niger Delta area of the country, as well as the pressure to import gasoline as a result of the non-operating capacities of the nation’s refineries.