The Central Bank of Nigeria reported during the week that Nigeria’s foreign exchange reserves hit $40 billion for the first time since January 2014, when it was N40.6 billion.
The jump in external reserves also represents about $14 billion increase from their January 2017 figures of $26 billion.
The CBN’s is the official bank of the Federal Government and keeps all foreign currency earnings of the government, which it often exchanges for naira via interventions in the forex market at official rates. The apex bank then uses the dollars in its possession to meet the country’s import needs.
Factors behind the rise
Crude Oil Rise
Crude oil prices have virtually doubled from as low as $40 a barrel to nearly $70. Oil production has also remained relatively stable due to a lull in militant activities in the Niger Delta. President Muhammadu Buhari in his new year speech also stated that dialogue was on going with various groups in the Niger Delta.
The Federal Government’s recently concluded Eurobond loans have also contributed significantly to the rise in the country’s FX positions. Nigeria borrowed about $4.8 billion in Eurobonds in 2017 an increase from about $1.5 billion in 2016.
An increase in Capital Importation was also observed in 2017, following the introduction of the Investor/Exporter window by the CBN. Data from the NBS reveals, Capital Importation increased to $6.8billion in the first 3 quarters of 2017 compared to a total of $5 billion in 2017 as a whole.
There was also a significant increase in inflow from autonomous sources of the CBN. These are sources other than oil and non-oil inflows and also includes forex inflows into domiciliary accounts.
Ban on 41 items
The CBN’s reluctance to lift the ban on 41 composite items from accessing forex for imports is also attributed to the build up of the reserves. The ban has significantly reduced access to forex for imported items into the country, further reducing the pressure to sell some of the forex earnings of the government.
Despite opening the Investor Exporter Window, the CBN still retains much of the capital controls it imposed in the early days of the forex crisis. For example, naira debit cards are hardly used by Nigerians abroad, following the heavy restrictions imposed by the CBN. Transfers out of domiciliary accounts are stil heavily restricted while most dollar denominated cards rarely facilitate forex transactions.
Implications of the rise in reserves
Healthy reserves for the country mean relative exchange rate stability. The ensuing foreign exchange crisis last year, lead to the CBN applying stringent measures to control demand. Several items were banned from the official exchange markets. Limits were also placed on Naira cards in terms of foreign exchange withdrawal and online transactions. Parallel market rates nearly hit N500 to a dollar. Several conglomerates in the country, had to rely on their parent companies for loans to purchase raw materials.
Critics of the CBN’s policies allege that the route to building up these reserves has been painfully rough and will end up wearing out on the long run. For example, some of the reasons given by the CBN to place heavy restrictions, was due to the need to reduced imports and encourage local production of goods and services. This, critics claim, was carried out with Nigerians and Nigerian businesses placed on the alter of sacrifice of higher inflationary pressure, high interest rates imposed.
Enhanced foreign exchange liquidity also gives foreign investors the required confidence to invest in the country. At the peak of the foreign exchange crisis, investors and businesses had difficulty repatriating their profits out of the country.
Reserves are not static
Contrary to popular lore, reserves are not static. While Nigeria benefits greatly from the rebound in oil prices, petrol is imported into the country due to an absence of working refineries. The government had recently hinted at a special foreign exchange window for petroleum importers in order to keep fuel prices at N145.
Risks still remain
As the nation gradually draws close to an electioneering season, political tensions will most likely be ratcheted. Militants in the country could decide to spring an attack on oil installations.
Onome and Ugo contributed to this article.