BOOM: External reserves hit two year high (highest since July 2015)
Nigeria’s external reserves surged to $31.2 billion, the highest since July 2015, according to external reserves data from the CBN as at August 8, 2017.
It is also the highest since Buhari was sworn in as President in July 2017, buttressing analysts’ impression that the economy is on a rebound.
Economic indices in the country have been on a rebound since the government reached a truce with Niger Delta militants late 2016. Prior to the truce, the Nigerian economy has been in a tailspin since the fall in the price of crude oil in July 2014.
From an external reserve of about $40 billion in January 2014, external reserves crashed to $34 billion by December 2014, triggering a first round of devaluation of the Naira. Foreign investors also began exiting Nigeria’s capital market instigating a stock market sell-off that drove equities to multi-year lows.
By the end of second quarter of 2016, the external reserves had dipped to as low as $25 billion while the Naira was officially depreciated to N305 from N197 at the start of the year. The economy was also officially pronounced to be in recession.
With a gradual but tepid rebound in oil prices and a seizure of hostility in the Nigeria Delta, Nigeria again commenced exports of crude oil, leading to an increase in government revenue. As reserves rose, the CBN introduced multiple exchange rate windows in February 2017 that helped stabilize FX price volatility and restored investor confidence.
The effect has been a resurgence of the bulls in the stock market, leading to a gain of about 40%, arguably the best stock market by returns in the world. The external reserve is a critical indicator of how viable third world economies are.
Third world economies like Nigeria, being sensitive to exchange rate volatility, rely on rising external reserves to keep their currencies stable and continue to attract foreign investments.