Low oil, capital flight shrink external reserves

Nigeria’s external reserves have been on a downward trajectory in recent months, driven by low inflows from crude oil sales and foreign capital.

The reserves, which gives the Central Bank of Nigeria (CBN) the firepower to defend the naira, declined by 12.70 percent to $35.19 billion as of May 19, 2023 compared to $40.31 billion as of January 21, 2022.

External reserves, also known as foreign exchange reserves, according to the CBN, are assets held on reserve by a monetary authority in foreign currencies. These reserves are used to back liabilities and influence monetary policy.

They include foreign banknotes, deposits, bonds, Treasury bills and other foreign government securities. These assets serve many purposes but are most significantly held to ensure that a government or its agency has backup funds if their national currency rapidly devalues. Foreign exchange reserves are also called international reserves.

The decreasing trend of the gross official reserves, according to a report by FBNQuest, can primarily be attributed to minimal accretion to the reserves from crude oil sales due to ballooning payments for fuel subsidies.

A secondary contributing factor, the report noted, was the limited inflow of foreign capital resulting from inherent weaknesses in Nigeria’s FX policy.

The country’s foreign exchange reserves dropped to $35.27 billion as of May 2, 2023 from $39.42 billion on May 4, 2022, data from the CBN showed.

The gross external reserves fell by a smaller margin of $246 million to $35.3 billion in April 2023, compared to $1.2 billion in March. The decline represents the ninth consecutive monthly decrease in the official reserves and is broadly consistent with the overall pattern observed since late 2021, the FBNQuest report stated.

Although oil’s share of GDP is relatively small at around 5.7 percent (2022 GDP), it is by far the country’s largest source of FX, accounting for about 87 percent of merchandise export earnings in 2022.

According to data from the National Bureau of Statistics, total capital imported into the country plummeted by 20 percent year-on-year to $5.3 billion, the lowest amount recorded since 2016.

Total reserves as at the end of April 2023 covered 7.3 months of merchandise imports on the basis of the balance of payments for the 12 months to December 2022 and 5.5 months when services are added, the report said.

On a year-to-date basis, the report noted that Nigeria’s gross external reserves experienced a sharp decrease of $1.8 billion, in stark contrast to increases of $1.5 billion and $548 million observed in Egypt’s external reserves and South Africa’s international liquidity position respectively.

Ayodeji Ebo, managing director/chief business officer at Optimus by Afrinvest, said the rate of inflow of FX through crude oil proceeds and other sources like portfolio investment and foreign direct investment has continued to plummet while the utilisation of the FX by the CBN increased.

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In its monthly report in May, the Financial Derivatives Company (FDC) noted that in April, Nigeria’s foreign exchange reserves maintained its downward trajectory. It fell by 0.45 percent to close the month at $35.25 billion on April 28th from $35.41 billion at the start of the month.

This was as a result of lower oil prices alongside the decrease in domestic oil production. In the same month, the price of Brent crude declined by 0.7 percent to $79.31 per barrel from $79.89 at the end of March while domestic oil production fell by 1.5 percent to 1.35 million barrels per day. The country’s import and payments cover decreased by 0.49 percent to eight months from 8.04 months at the beginning of the month.

“The further depletion of the reserves will limit the CBN’s ability to intervene in the forex market, which could lead to Naira depreciation. Also, the depletion of external reserves could douse investor confidence as investors become worried about the country’s ability to meet its obligations,” analysts at FDC said.