Nigeria’s reserves down $1.38bn in 30 days amid rising oil prices

By Charles Abuede

• Fallen by $511.3m since start of 2021
• But oil price averaging $58pb, above FY21 budget benchmark
• Naira still pressured due to failed FX buffers

Nigeria’s external reserves have continued a southward downhill climb dropping as much as $1.38 billion on this journey, according to recent data obtained from the Central Bank of Nigeria at the weekend. From $36.52 billion on January 25, 2021, the reserves fell to $35.14 billion exactly a month later.

The decline represents a marginal one per cent over a 30-day watch, but it comes amidst an environment that has witnessed increasing price of Brent crude, which has rallied to about $66.28 a barrel in the global oil market.

The current shades of events that have shown a positive rally in the crude oil market amidst Nigeria’s near zero foreign direct investment (FDI), and very poor foreign exchange inflows as a result of the country’s needle-eye exports, along with negative market reactions to the state of liquidity, and significantly, little or no shift in the naira-dollar exchange rates, has signposted the importance of keeping and maintaining appropriate FX buffers.

Crude oil prices have recovered from their lows of around $19 per barrel in April 2020, and currently doing an average of $60 per barrel. The drop in crude oil earnings and the associated reduction in foreign portfolio inflows have significantly affected the supply of foreign exchange into Nigeria. As a result, with the decline in the country’s foreign exchange earnings and subsequent adjustments in the value of the naira vis-à-vis the US dollar, adjusting for the decrease in supply of foreign exchange has forced the naira to depreciate at the official window from N305 in 2016 to N360 in 2019 and now hovers around N410 to the dollar.

In a statement on Friday, Godwin Emefiele, the CBN governor, assured that the apex bank has continued to implement a demand management framework, which is designed to support improved production of items that can be produced in Nigeria, and further conserve the nation’s external reserves. It, however, remains to be seen how the current speed with which the external reserves are depleting is being tackled.

Many analysts spoken to say urgency is required to think up fast and strategic steps to deploy to correct this growing concern of depleting external reserves.

With over $35 billion worth of reserves Nigeria has sufficient cover for seven months of import of goods and services, although the international rule of thumb is to have cover for three months of imports, while as stipulated in the 2007 CBN Act, the CBN must at all times, maintain a reserve level that should be able to fund or sustain two (2) years’ worth of imports.

Poring over the data gathered from the CBN, it was observed that Nigeria’s external reserves depleted by $511.3 million to $35.14 billion at the close of February 2020 from $35.65 billion since the start of the year.

However, with the on-going reopening of the national borders, continuous positive rally in the price of Brent crude in the global market, and several efforts by the apex bank to defend the local currency, which has come under severe pressure from increased demand for dollar over tha last few months, there appears to have been a glimmer with the reserves rallying to $36.1 billion by the second week of January.

The party was not yet over when the rally saw a downward movement due to fears of a second wave of the Covid-19 pandemic, as well as the level of scepticism by foreign investors on vaccine hopes and the supposed stimulus package from the US president.

Nigeria’s external reserves have once reached a dizzying height of as much as $64 billion. That was in 2008 before the global financial crisis. And it has also hit a very low of $23 billion in 2016 on the back of the recession experienced by the economy in that year.

Since the start of 2021, oil prices have continued to show momentum, up 27.5 per cent year-to-date after gaining 7.9 per cent and 18.2 per cent in January and February month to date respectively. For the government, actual revenue performance in the first quarter of 2021 is expected to receive a boost from the recovery in oil prices. So far, in the first three months of 2021, oil prices have averaged $58.5 per barrel and about 47 per cent above the 2021 budget benchmark of $40 per barrel. This implies an inflow into the excess crude account.

However, the coast is uncertain given the fragile rebalancing of the oil market on a lower demand outlook and measures to contain the virus which weighs heavily on recovery prospects. But, based on past actual budget performance, the shocks to oil prices would significantly drag revenue performance in 2021, resulting in wider deficits.

Nevertheless, if oil prices continue to trend higher, analysts have indicated their expectations in the price modulation template of the PPPRA to reflect higher landing costs. This implies that Nigerians would pay a higher pump price with major inflationary pressure in the near-term.

On the contrary, though, with weak revenue performance, Nigeria’s federal government lacks the capacity to take on subsidies. From estimate, the landing cost at the current oil price level, using an exchange rate of N379 to a dollar from the CBN official window, is north of N180 per dollar, which now stands at 9.1 per cent above the NNPC pump price.

An economic analyst who expressed their views on the issue to Business A.M., proffered that Nigeria should drive the gospel of economic diversification of its non-oil sector as a way to earn foreign exchange to maintain reserve liquidity.

Dubem Enaruna, a lecturer in economics at the Nigerian Maritime University said that the country can embark on the expansion of her export base while driving the vehicle of her non-oil sectors such as tourism and hospitality, amongst others.

Many other analysts opined that understanding what drives Nigeria’s external reserve position is a key to resolving the issues bordering the recent decline in the reserve. Though, Nigeria’s susceptibility to crude oil receipts has largely contributed to external reserve mirroring oil price movements. This is further compounded by an inefficient exchange rate determination mechanism that has dampened export growth and weakened foreign investment flows. Thus, we must delineate the remedial measure for falling external reserves into the short term measure and long term measure, they entreated.

Fundamentally, for the short term measure, the CBN must begin the transition to a market determined foreign exchange rate that would revive the already weakened FDI and FPI inflow and eventually stimulate economic growth. For the long term, the government must radically drive the gospel of economic diversification through prioritization of the non-oil sector.