Nigeria’s external reserves fell to $33.9 billion on Wednesday, July 19th, 2023 its lowest level in two years.
This is according to data from the central bank obtained from its website. The apex bank regularly updates its external reserves data.
The last time the external reserve touched this level was in July/August 2021.
The country’s external reserve position has been on a downward trend in the last few months as demand pressure for forex spiked amidst lower forex earnings.
This is despite the introduction of the revised I&E Window on the 14th of July 2023.
The external reserve was $35 billion when Tinubu was sworn in as president and $34.6 billion on July 13th, the eve of the changes to the forex policy.
However, a lack of forex supply amidst foreign investment apathy appears to have exacerbated the decline in external reserves.
Why the drop?
Nigeria has been struggling with lower foreign exchange earnings over a reduction in crude oil revenues. The country blames the lower oil revenues on crude oil theft.
In addition, a lack of foreign investor inflow due to lower interest rates has also been a drawback in the current government’s quest to reverse the trend.
Apart from calls for a unified exchange rate which have since been acceded to, foreign investors also have issues with the country’s growing debt and its fiscal crisis.
Meanwhile, the exchange rate between the naira and the US dollar closed at N768.16 per dollar at the official Investor and Exporters window on Thursday, 20th July 2023.Â
- The official exchange rate opened at N787.13/$1 but reached a high of N844/$1 during intraday trading and a low of N700 per dollar.Â
- The naira also weakened significantly against the US dollar at the parallel market on Thursday, closing at N860/$1.
Why this matters: External reserves play a crucial role in maintaining the stability of a country’s currency.
- They provide a buffer to support the value of the domestic currency and ensure its convertibility.
- With lower reserves, the naira may come under increased pressure, leading to potential depreciation.
- A weaker currency can have adverse effects on various sectors, including imports, inflation, and investor confidence.
- Nigeria heavily relies on imports for various goods and services, including critical sectors like energy, machinery, and consumer goods.
Adequate external reserves are essential to ensure a steady supply of foreign exchange (forex) to meet import demands.
However, the declining reserves indicate a potential scarcity of forex, which can lead to challenges in accessing essential imports and hinder economic activities.
What is the solution to this present economy issue facing Nigeria and selecting the weak currency.
The Unification of Nigeria’s Exchange rate alone, isn’t enough to attract Foreign Inflows and FDI without a Proper Management of Nigeria’s Foreign and Domestic Debts that are very high and on a rising trend. Fiscal Side of the Economy needs a proper overhaul as well.
Tax Reforms by the Tinubu Administration is a good step towards a meaningful growth.
The Upcoming MPC Meeting would demonstrate the Administration’s readiness towards achieving the most needed growth that Nigeria deserves after the recent Removal of Fuel Subsidy.