Nigeria’s external reserves plunge to one-year low

Nigeria’s external reserves have tumbled to a one-year low following weak foreign investment flows and reduced accretion from crude oil sales.

The foreign reserves, which gives the Central Bank of Nigeria (CBN) the firepower to defend the naira, declined by 5.47 percent to $38.28 billion in September 29, 2022 from $40.50 billion at the end of last year, data obtained for the CBN show.

A monthly report by Afrinvest Securities Limited noted that Nigeria’s foreign reserves shed 1.8 percent month-on-month to close September at $38.3 billion.

Fears of a global recession amid monetary policy tightening dragged the average price of Brent crude oil lower by 7.5 percent m/m to $90.0/bbl. – the lowest since the war in Ukraine began.

Total value of foreign capital attracted by the petroleum industry in the second quarter of 2022 fell from $11.3 million in Q2 2021 to $1.93 million in Q2 2022, according to the National Bureau of Statistics.

One of the reasons for the external reserves decline, according to a report by FBNQuest, is the exit of foreign portfolio investors (FPIs) from Nigeria.

Portfolio investments, which declined by 2 percent year-on-year (y/y) but grew by 49 percent quarter-on-quarter (p/q), accounted for the majority (61 percent) of total capital imports into the country at $958m.

According to the CBN, foreign exchange reserves 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.

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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 or external reserves.

At its meeting last week, the Monetary Policy Committee urged the central bank not to relent on the various policies put in place to support non-oil exports to shore up external reserves.

Naira recorded negative performance across the market segments in September. At the parallel market, rates opened at N703.00/$1.00 and closed at N745.00/$1.00, depreciating 1.8 percent m/m. Similarly, at the Investors & Exporters’ (I&E) Window, the naira weakened 6.0 percent m/m to N437.03/$1.00, according to the Afrinvest report.

At the FMDQ Securities Exchange (SE) FX Futures Contract Market, the total value of open contracts rose 6.4 percent m/m to $4.1 billion, buoyed by the 2,443.5 percent and 288.8 percent m/m jump in the contract values of Nigeria’s September and November instruments with additional subscriptions of $229.9 million and $136.4 million respectively.

“In October, we anticipate extended pressure on the Naira across market segments as weak foreign investment flows and reduced accretion from crude oil sales (due to unabated large[1]scale oil theft) continue to weigh on CBN’s supply capacity,” analysts at Afrinvest said.

Razia Khan, managing director and chief economist, Africa and Middle East Global Research at Standard Chartered Bank, said last week that Nigeria needed to liberalise its foreign exchange regime with fuel subsidy reform following as soon as conditions allow.

Apart from the exit of PFIs, other reasons for the decline in external reserves are coupon payments (adjusted for $150m in May) on Nigeria’s sovereign Eurobonds in May, other debt service costs, and a possible increase in the CBN’s interventions at its multiple windows.