The latest data obtained from the Central Bank of Nigeria (CBN) reveal Nigeria’s foreign reserve has fallen to its lowest level in 10 months. As of Monday, 8th March 2021, Nigeria’s foreign exchange reserve stood at $34.74 billion, representing a year-to-date decline of $632.9 million (1.79%).
The last time Nigeria’s reserve position was at this level was 11th May 2020, exactly 10 months ago.
The foreign reserve has recorded a steady decline despite the recent bullish run in the global oil market. Brent Crude oil topped $70 per barrel earlier in the week before it slumped back to $65.57 as at the time of writing this article.
However, the persistent decline in Nigeria’s external reserve position can be attributed to the intervention of the CBN in the forex market to stabilise the exchange rate. Despite these interventions, the naira endured a series of devaluations in 2020 and is currently trading at N412/$1 in the Importers and Exporters (I&E) windows.
A recent article published by Nairametrics revealed that analysts had attributed the drop to a number of reasons, some of which include, low foreign inflows into the country, forex market intervention, and forex policies that have discouraged foreign investors.
According to the article, the president of the Association of Bureau De Change Operators of Nigeria (ABCON), Aminu Gwadebe said that the decline of Nigeria’s external reserve despite the recent increase in oil prices was due to supply shocks and shortages of foreign exchange as a result of drop of forex inflow from various sources.
In the same vein, Odinaka Nwokonkwo, a treasury, and financial analyst suggested that the decline could be due to the payment of Nigeria’s $500 million Eurobond that reached maturity in January 2021. He stated that CBN also did FX swap with local and international counterparts which may have matured and needed to be paid down, consequently affecting the country’s foreign reserve.
Earlier in the month, the Apex bank announced the introduction of the “Naira 4 Dollar Scheme” as an incentive for senders and recipients of International Money Transfers.
According to disclosure, the CBN through the commercial banks will pay to remittance recipients the incentive of N5 for every $1 remitted by a sender and collected by the designated beneficiary. The scheme took effect on Monday, March 8, 2021, and will end by 8th May 2021.
This move is geared towards encouraging inflows of diaspora remittances to the country, which is expected to reflect in the nation’s foreign reserve and by extension the exchange rate.
A cursory look at the data from the World Bank shows that Nigeria is the 7th highest recipient of migrant remittance in 2019, with a total inflow of $23.81 billion behind Egypt ($26.78 billion) and France ($26.84 billion).
The data also shows that Nigeria received a total sum of $110.48 billion in remittances between 2015 and 2019.
Despite the huge diaspora inflows and recent rallying oil price, the external reserve is yet to hit the $40 billion thresholds as it was as of November 2019.
Foreign exchange reserves are assets held on reserve by a monetary authority in foreign currencies, quite often used to back liabilities and influence monetary policies. They could be in the form of foreign banknotes, deposits, bonds, treasury bills, and other foreign government securities.
Nigeria’s external reserve is very crucial in defending the naira and is used to cover the country’s huge import bills. An increasing external reserve suggests a higher inflow from crude oil earnings, foreign inflow from investors, and external loans.
Meanwhile, a look at the foreign trade report, shows that Nigeria recorded a N7.4 trillion trade deficit in 2020, owing to the disruptions caused by the covid-19 pandemic, which dipped the country’s export by 34.75%.
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