The external reserves of Africa’s biggest economy is currently unmoved by a recent bullish run in the global oil market, despite Brent crude oil topped as high as $70.
Nigeria’s external reserve is very crucial in defending the naira and is used to cover the country’s huge import bills. A decreasing external reserve suggests a lower inflow from crude oil earnings, foreign inflow from investors, and external loans.
Nigeria’s external reserve declined from $36.3 billion as of January 29, 2021, to $34.5 billion as of March 22, 2021, losing about $1.8 billion in 52 days, according to the Central Bank of Nigeria’s (CBN) data.
The rapid drop in the country’s external reserve is occurring despite Brent crude hovering around $65 within the period, hitting as high as $70 in March 7 2021, from about $56 per barrel that it closed within January 2021.
For most analysts, the CBN intervention in the forex market to stabilise the exchange rate, low foreign inflows into the country and some discouraging FX policies are discouraging foreign investors from increasing their exposure to the Nigerian market.
According to Boboye Olaolu, sub-Saharan Africa economist at securities trading firm, CSL Stockbrokers, the interventions by the apex bank to stabilise the exchange rate alongside repatriation or policy around FX are still major factors that continue to strain Nigeria’s foreign reserves, despite rallying all prices.
“Also, oil earnings take about three months to settle in cash, which means most of the transaction for the crude oil prices we saw some weeks back are yet to settle in,” Olaolu said.
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Oil revenue constitutes about 60 percent of the government’s revenue and 90 percent of Nigeria’s source of foreign exchange earnings, even though it accounts for just 9 percent of the nation’s GDP.
“It is an open secret that the CBN’s intervention is currently causing concern for investors,” Olaolu said.
In Tuesday’s Monetary Policy Committee (MPC) meeting, the CBN governor, Godwin Emefiele, held on to his gun, insisting the apex bank had not intervened in the Investors and Exporters window since January.
“This was the same script they initially deployed about devaluation last year until they finally devalued,” Olaolu said, noting, “Investors are worried about the numerous uncertainties in the market.”
Going forward, Olaolu predicted Nigeria’s reserves will pick up to around $40 billion while the CBN may also devalue the naira by at least 10 percent before the end of year.
For Muda Yusuf, director-general, Lagos Chamber of Commerce and Industry (LCCI), the transaction cycle between crude oil sales and the actual revenue might be responsible for the lower external reserves.
Yusuf acknowledged that Nigeria still loses a sizable part of inflows through the import of petroleum products, which affect NNPC remittance, due to the non-deregulation of the downstream sector.
The latest data obtained from the National Bureau of Statistics (NBS) show Nigeria spent N2.11 trillion importing petrol in 2020, which was 12.54 percent higher than amount spent in 2019.
“Because the exchange rate is still not market-driven its suppressing supply and discouraging investors from investors due to uncertainties concerning repatriation,” Yusuf said.
Nigeria’s external reserve came under intense pressure last year following a crash in dollar inflows, triggered by the coronavirus pandemic, constraining the apex bank’s ability to defend the naira against the dollar.
In 2020, Nigeria’s capital importation tumbled by 60 percent, falling from $24 billion the preceding year to $9.7 billion.
“Lot of exporters are complaining to me and threatening to relocate due to the discouraging factor of not having a unified exchange rate,” Yusuf told BusinessDay.
Early this year, global rating agency, Fitch, predicted Nigeria’s external reserves to hit $42 billion by the end of 2021, the highest since September 2019, courtesy of a projected average oil price of $53 per barrel.
Other experts have warned that except the divergent exchange rates are harmonised, Nigeria will continue to remain uncompetitive in the global investment market as a huge differential between the official and parallel market rate remains very high at about N101 per dollar (about 28%).
The apex bank has continued to fund the Nigerian Autonomous Foreign Exchange Rate (NAFEX), which is expected to lead the currency market liberalisation. The intervention restricts the official rates’ tendency to close up the wide gap with the parallel market, where naira currently trades at N483/$.
The naira/dollar exchange rate closed at N408.75k on Wednesday at the I&E window while at the black market and Bureau De Change (BDC) segment of the FX market, naira remained unchanged at N485 and N486 per dollar, respectively.
On Thursday, Brent crude, the benchmark for Nigeria’s oil, rose more than 2 percent to $63.55 after a ship ran aground in the Suez Canal, Egypt, raising supply concerns, although fears of a slow recovery in demand due to European lockdowns limited gains.
Ships in the Suez Canal were being diverted to an older channel on Wednesday after a large container ship ran aground, blocking vessels passing through one of the world’s most important waterways.
“Price support is coming courtesy of a transport blockage,” said Stephen Brennock of oil broker PVM. “Yet market sentiment will likely struggle to shake off its newfound bearish trend.”
More petrodollars mean
Most experts say the current reality of Nigeria’s external reserves shows Africa’s biggest oil-producing country seems to be overestimating the power of its oil to keep the country running, which means there is an enduring reality it needs to find other ways of earning foreign exchange.
Nigeria external reserve, which is seen as a war-chest to cushion the effect of external shocks, fell to a record low of $34.8 billion in March 2021, and it is only a $3.4 billion emergency support facility from the International Monetary Fund that saved the reserve from falling further.
