Nigeria’s reserves accretion above $40bn but debt level climbs higher

• Year-end reserves to hit‭ $‬48bn‭, ‬say analysts
• To be driven by oil price rise‭, ‬Eurobonds float

Nigeria’s external gross reserves are on the rise again, but the country’s debt levels are climbing in the same proportion if not more. Despite the foreign exchange rationing, which has lingered in the currency market for the past months, Nigeria’s gross official reserves has maintained its steady accretion in the month of October, after gaining 7.2 percent in September, to close the month at $36.78 billion; and now, to above $40 billion to about $41 billion as of Friday October 22, data obtained from a source at the Central Bank of Nigeria (CBN) show.

The Central Bank data show that Nigeria’s gross official reserves rose to $40.76 billion as of the aforementioned date from about $37 billion in September after rising by about $2.8 billion from $34.02 billion in the month of August.

Some bullish economic analysts have, however, asserted that, notwithstanding the recency of the months of accretion recorded, the reserves is likely to further increase to $48 billion before the close of the year as a result of the Special Drawing Rights (SDRs) worth about $3.35 billion from the International Monetary Fund, as well as, the $4 billion in Eurobond issue in the year 2021.

Despite this rise, amidst the positive rally in oil prices to around $80 per barrel in the world oil market, Nigeria’s total public debt stock has remained elevated. The debt management office (DMO), in its recent publication reported that Nigeria’s total public debt stood at N35.5 trillion as of June 2021, representing a 7.1 percent quarter on quarter increase compared to N33.1 trillion reported in the first quarter of 2021.

The year on year analysis shows that total public debt rose by 14.4 percent compared to N31 trillion in the second quarter of 2020. Also, the total external debt stock from the international debt market increased by 9.9 percent quarter on quarter to N13.7 trillion by the close of 2021 second quarter, from the first quarter’s N12.5 trillion; while domestic debt from the local debt market rose by 5.4 percent quarter on quarter to N21.8 trillion by June from N20.6 trillion reported in the prior first quarter of 2021.

Furthermore, a detailed analysis of the total debt stock of Nigeria shows that it has grown by over 270 percent from 2015 levels of $10 billion and is now above $37 billion. However, this echoes the pressure on the government to hang on to borrowings, as economic growth has remained festered; the government continues to borrow to finance its budget, with the DMO informing that the federal government spent N1.5 trillion on debt service payments in the first half of the year. This implies that in the first three months of 2021, the country spent N1 trillion on both domestic and external debt servicing, while it also spent a total of N445.5 billion in the second quarter of 2021 for the same cause.

According to Mike Obadan, a CBN MPC Board member and professor of Economics, at the University of Benin (UNIBEN), in a comment said: “The Naira’s value could be determined by the strength of Nigeria’s economy in the area of production capacity, structure and diversification of the export production base.

“A vibrant and diversified productive real sector of the economy saves a nation the disbursement of scarce foreign exchange for the import of finished goods and production inputs, especially where these could be produced locally, and reduces pressure on foreign exchange demand. In the same way, an export-oriented production base contributes substantially to foreign exchange supply, which in turn, strengthens the local currency,” Obadan said.

For Bismarck Rewane, chief executive officer of Financial Derivatives Company Limited, in a recent breakfast outlook publication, said:“External reserves, which gained 7.2 percent in September at $36.78 billion, will be likely to increase further beyond $38 billion due to IMF’s SDR allocation of about $3.35 billion to Nigeria and Eurobond issue of $4 billion by the nation’s federal government in September. External reserves to continue its steady accretion as forex rationing lingers and supported by increased inflows from Eurobond issue of $4 billion and external debt rising,” Rewane explained.

However, the federal government recently made a move into the Eurobond market successfully to raise $3 billion, but ended up raising $4 billion from the international debt market in three tranches of 7-years bond ($1.25 billion), 12 year bond at $1.5 billion and the 30 year bond at $1.25 billion, of which the proceeds are expected to steadily boost the reserves soonest, as anticipated by all.

With Nigeria grappling with declining revenue and devaluation of its currency in the face of weakening Naira in the currency market, Nigeria’s debt liabilities have continued to be on the rise given her fiscal imbalances, which were driven by shortfall in revenue in the past few months.

Although higher oil prices should be positive for most oil-producing nations, given Nigeria’s limited production capacity, industry stakeholders say they do not expect Nigeria to reap the full benefit from production capacity.

According to Organisation of Petroleum Exporting Countries (OPEC) figures, Nigeria’s oil output fell 7 percent month on month to 1.2mbpd in August, below its production quota of 1.55mbpd. Assuming the federal government somehow raises the additional $2.2 billion, then reserves could be seen at $40 billion or above by year-end, barring any large outflows.

In their outlook of indicators by analysts at AXA Mansard Asset management, they asserted that, “In a best case scenario for Nigeria, should the price of oil witness a significant rise, sequel to demand outweighing supply, FX reserves could increase to as high as $40 billion. In the worst case scenario, however, they noted that should supply of oil increase over the quarter, therefore resulting in a decline in oil price, FX reserves could decline to as low as $30 billion.”

Meanwhile, it would be recalled that the global long term needs for reserves is being addressed through the $650 billion in special drawing rights (worth SDRs456 billion) disbursed to most vulnerable economies, by the International Monetary Fund (IMF), during the worst economic crisis since the great depression, and also to help these low-income countries strengthen their response to the COVID-19 crisis, following the due approval by the Fund’s board of governors.

For Nigeria, an estimated $3.35 billion in SDR allocation and entitlement from the IMF may bring a cushion to her ailing and depleting reserves.