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Nigeria’s external reserves dip amid record-high oil prices

External reserves seen rising further on inflows

Nigeria’s external reserves fell further by $175 million in February to $39.9 billion, despite the upturn in the price of crude oil, the country’s main source of foreign exchange.

The decline followed a boost of over $7bn from international debt issuance and the International Monetary Fund’s Special Drawing Rights allocation in the third quarter of 2021, according to FBNQuest.

The external reserves, which closed at $40.52 billion in December 2021, dropped to $40.04 billion at the end of January this year, data from the Central Bank of Nigeria (CBN) show.

Members of the Monetary Policy Committee noted at their meeting in January the dwindling proceeds from oil sales, despite rising crude oil prices.

They highlighted the need to address the persistent reduction in remittance of oil revenue to the Consolidated Revenue Fund by the Nigerian National Petroleum Company and urged the national oil firm to urgently address the anomaly.

The CBN normally defends the naira with the country’s foreign exchange reserves. Forex outflow through the economy increased by 32.3 per cent to $4.31 billion in October 2021, according to the CBN.

Its October economic report revealed that outflow through the central bank increased by 45.6 per cent, relative to September, mainly as a result of third-party MDA transfers and interbank sales.

The naira weakened across markets in February. At the parallel market, rates opened at N566.00/$1.00 and closed N574.00/$1.00, depreciating by N8.00.

At the Investors’ & Exporters’ window, the local currency depreciated by N1.33 to N416.67/$1.00 as the activity level at the window dipped by 15.5 percent to $80.3m.

Afrinvest Securities Limited said in a report that the external reserves fell 1.7 percent month-on-month to $39.8bn due to demand-supply mismatch.

The total reserves at the end of February would cover 9.5 months of merchandise imports, based on the balance of payments for the 12 months to September 2021, and 7.2 months imports when services are added.

“We consider this a healthy buffer,” analysts at FBNQuest said in a note on Thursday.

Although crude oil prices have rallied strongly in recent months on the back of global supply-demand imbalances and geopolitical tensions, the latest of which is Russia’s invasion of Ukraine, Nigeria has not reaped the benefits.

Taiwo Oyedele, head of tax and corporate advisory services at PwC, said Nigeria had not benefited from the oil rally because of its low crude oil production and the rising cost of petrol subsidy.

“The implication is that rather than benefit from rising oil prices, the country is bleeding, with huge impact for government revenue and foreign exchange reserves which in turn escalates exchange rate risk and budget deficit,” he said.

The weak accretion to the reserves is largely due to Nigeria’s low crude oil output.

Read also: Nigeria’s daily petrol subsidy hits N10.1bn, as oil surges

“We see from OPEC’s monthly oil report that Nigeria’s crude oil output (excluding condensates) averaged around 1.3 million barrels per day (mbpd) through 2021, far below its OPEC production quota of c.1.7mbpd,” FBN Quest analysts said.

They noted that output had dwindled on the back of evacuation challenges, mainly losses due to pipeline vandalism from crude oil theft, and ageing evacuation infrastructure.

They said the delayed passage of the Petroleum Industry Act for over a decade stalled sizable investments by the international oil companies (IOCs).

The analysts said, “Given the IOCs’ continuous divestments from Nigeria, as seen by Seplat Energy’s announcement of a share purchase agreement for the acquisition of Mobil Producing Nigeria’s shares, the Act has come too late in some respects.

“We understand that a separate but related concern is that the NNPC has entered into some crude oil forward sales that do not necessarily reflect the current pricing levels. The situation has been exacerbated by the inability to produce at optimal levels.”