Nigeria’s foreign reserves closed out 2022 at $37.1 billion, having lost $3.43 billion during the year compared to the $40.52 billion recorded at the beginning of the year.
This is according to data tracked by the Central Bank of Nigeria (CBN) and seen by Nairametrics.
Cause of depreciation: The $3.43 billion loss in Nigeria’s foreign reserves can be attributed to the constant intervention by the Central Bank of Nigeria at the official FX market in a bid to defend the local currency.
Despite the intervention, the exchange rate at the Importers and Exporters window depreciated by 5.7% in 2022, closing the year at N461.5/$1 compared to N435/$1 recorded as of the close of trade in the previous year.
Also, the exchange rate at the parallel market depreciated by 23.1% to an average of N735/$1 in a highly volatile year that saw the exchange surge to N900/$1 in November.
What are foreign reserves? Foreign reserves, also known as external reserves or foreign exchange reserves, are assets denominated in a foreign currency, held by a country’s central bank. The assets could include foreign currencies, bonds, treasury bills, gold, and other securities.
Foreign reserves are strategic assets that help the apex bank of a country to defend its local currency and fund business import bills. Nigeria has been facing massive currency volatility in recent times, owing to a crunch in FX inflow amidst high demand for dollars.
Foreign reserves in 2021: It is worth noting that the external reserve rose past $40 billion in 2021 as a result of inflows from the IMF as well as a $4 billion Eurobond issuance. In August 2021, Nigeria received a sum of $3.35 billion from the International Monetary Fund as part of the Special Drawing Rights (SDRs).
One month later, Nigeria also raised a $4 billion Eurobond from the international debt market, which saw the country’s foreign reserve level improve from around $36 billion to over $41 billion in November 2022. However, a lack of FX inflows and increased demand for greenbacks have plunged into Nigeria’s foreign reserve.
FDIs at record low: Foreign direct investments (FDI) in Nigeria have dwindled significantly since the hit of the covid-19 pandemic, falling to record levels. Specifically, according to data from the National Bureau of Statistics (NBS), Nigeria received $302.13 million as FDI between January and June 2022.
This is significantly lower than pre-pandemic levels. For example, in the same period of 2019, Nigeria recorded an FDI of $429.72 million (2018: $507.96 million).
The lack of FDIs, which has been attributed to socioeconomic factors has impacted the growth level of the nation’s reserve and by extension the exchange rate.
In the same vein, foreign portfolio investment has also taken a hit in the past three years, falling to $1.71 billion in the first half of 2022 from $1.77 billion and $4.69 billion recorded in the corresponding period of 2021 and 2020.
Household remittance on the rise: Between January and June 2022, Nigeria received a sum of $10.11 billion through diaspora remittances, representing a 9.6% increase compared to the corresponding period of the previous year.
The increase in diaspora remittance is largely attributed to the CBN Naira4dollar initiative, which incentives recipients for every dollar they receive through the CBN IMROs.
The recent outflux of Nigerians abroad could also serve as a major positive for the Nigerian economy as diaspora Nigerians will send funds to their families in the country.
The numbers are beginning to shore up from the dip recorded in 2020 as a result of the covid-19 pandemic. A major boost for the Nigerian economy, which is in dire need of foreign exchange, considering the sustained liquidity crunch and depreciation of the local currency.
The World Bank estimates that Nigeria’s diaspora remittance will hit $20.9 billion in 2022, a 7.5% increase from the prior year.
Meanwhile, despite the over $3 billion loss, the external reserve has resumed an uptrend towards the end of the year, gaining almost $150 million in the last week of the year. According to the Nigerian Upstream Petroleum Regulatory Commission, Nigeria’s daily crude oil production output increased to 1.41 million barrels in November 2022 and is expected to hit 1.6 million barrels per day in Q1 2023.