Key highlights
- Nigeria’s external reserves lost nearly N1 billion in one month as it dropped to $35.74 billion as of March 24, 2023.
- This is the lowest balance in about 18 months, since the reserves fell to $35.73 billion on September 20, 2021.
- Despite the drop, the outgoing administration is set to leave more money in external reserves than it met when it took over in May 2015.
Nigeria’s gross external reserve has fallen to $35.74 billion dollars as of March 24, 2023. This is the lowest balance since September 20, 2021, when the reserves fell to $35.73 billion, according to data from the Central Bank of Nigeria (CBN).
A cursory look at the data also shows that the external reserve dropped by $938.14 million in just one month, when compared with the $36.69 billion that was recorded on February 27, 2023, thereby putting more pressure on the country’s foreign exchange market and economic stability.
However, despite the consistent drop in Nigeria’s external reserve since the beginning of the year, President Muhammadu Buhari’s administration is on track to leave more money in external reserve than he met when he took over office on May 29, 2023. The external reserve as of May 28, 2015, was $29.44 billion.
Why the drop
Nigeria’s external reserve is largely funded by the sales of crude oil to other countries, foreign loans or grants and capital importation.
The country is still far from meeting its 1.8 million barrels per day OPEC quota, despite the drop in crude oil theft and an increase in Nigeria’s oil production to 1.3 million barrels per day. This is further exacerbated by the huge resources spent on petrol subsidy and the volatility of oil prices.
The drop in foreign exchange inflow has put a lot of pressure on the external reserve with the CBN intervening to bolster the foreign exchange market and defend the naira.
The pressure on the naira in the foreign exchange market continued unabated as the CBN maintained its intervention to keep the value of the currency stable.
The apex bank has continued to conduct FX auctions, selling forex to deposit money banks as a way to stabilize the exchange rate market, thereby further depleting the reserve.
As of the close of business on Monday, March 27, 2023, the exchange rate between the naira and the dollar stabilized at the black market to trade at an average of N746/$1, while the exchange rate at the official I&E window closed at $461.33/$1.
However, in response to the declining external reserve and foreign exchange earnings, the CBN introduced a couple of measures to halt the trend including placing some restrictions on foreign exchange transactions and increasing interest rates.
Commercial banks are reported to have started cutting Personal Travel Allowance (PTA) and Business Travel Allowance (BTA) by 50% from $4,000 to $2,000, as the country struggles to control its dollar demand.
What this means
A continuous drop in the country’s external reserves poses a huge challenge to the CBN and its ability to continue to intervene in the foreign exchange market and stabilize the naira.
The declining forex inflow from crude oil sales means that the Federal Government will have to intensify its effort on non-oil proceeds.
The CBN could consider another devaluation of the naira if the external reserves continue to decline, although that is highly unlikely before the inauguration of the next administration in May 29, 2023.
Liquidity key to improvement in FX market
During a chat with Nairametrics, the President of the Association of Bureau De Change Operators of Nigeria (ABCON), Aminu Gwadabe, said that liquidity is key to the improvement in the foreign exchange market with the naira rebounding.
The ABCON President who maintained that there is still forex scarcity said that he doubts if the Nigerian National Petroleum Company (NNPC) Limited is remitting inflows to CBN despite improved oil production and prices due to subsidy
- Gwadabe said, ‘’There are a lot of things that determine the exchange rate, number one, what is your buffer? I am not sure the NNPC have started remitting any inflow to CBN, all along it’s like they are using it for subsidy. So I don’t think that the improvement in oil prices has started to reflect in our buffer. Our buffer is still dwindling to the extent of even putting a cap from $4,000 to $2,000 for PTA, so those are reflections of scarcity in the market. So the expectation that the prices have gone up is yet to reflect in the domestic economy.
- ‘’The lack of naira has really dampened the fictitious demand in the market. It is when there is liquidity that the exchange rate will come down.
- ‘’The market is very quiet, you see having emotion is not fundamental enough to really put any positive impact until that liquidity is in the market. Yes, the naira redesign has gone a long way to checkmate hoarding and speculation, and most people do not even have the naira to speculate.’’
