The persistent decline in Nigeria’s foreign (FX) exchange reserves should not cause much worries as sources of accumulation have been identified.
Data from the Central Bank of Nigeria (CBN) show that gross official reserves declined by $910 million to $33.32 billion in June. External reserves stood at $33.14 billion as of July 8, 2020, the latest data from the CBN showed.
The CBN data show that Nigeria’s foreign reserves plunged to its lowest level in four years in June, hardly reflecting the marginal gains in rising oil prices in recent months.
According to the data the country’s external reserves maintained a downward trend as it lost $910 million to $33.32 billion in June. Total reserves at end-June covered 7.6 months’ merchandise imports on the basis of the balance of payments for 2020, and 5.5 months when we add services.
It was unclear why the reserves fell at a time of rising crude oil prices, although similar declines in the past were attributed to the interventions by the apex bank to stabilise the exchange rate. The spokesperson for the CBN, Osita Nwasinobi, did not return calls as at the time of filing in this report.
However, analysts at FBNQuest say, “For a more accurate picture, we should adjust this gross figure for the pipeline of delayed external payments.”
Total reserves by end of June covered 7.6 months’ merchandise imports on the basis of the balance of payments for 2020, and 5.5 months when added services. The cover is a little flattering.
Johnson Chukwu, managing director/CEO, Cowry Asset Management Limited, says Nigeria’s balance of trade has remained negative, and the portion that would have offset it, which is the invisible, is also negative.
The recent report on foreign trade by the National Bureau of Statistics (NBS) indicated a trade deficit of over N3.9 trillion in the first quarter of 2021.
“This latest decline in reserves is not, however, grounds for alarm since we have identified a number of sources of accumulation,” the FBNQuest analysts note.
The first source, according to FBNQuest, is Eurobond issuance. The Debt Management Office has been mandated to raise N2.34trillion ($5.69 at the I&E rate) from the market by way of external financing in 2021. The Nigerian Senate has now reportedly approved the lending.
The second is the International Monetary Fund’s (IMF) proposed allocation of Special Drawing Rights (SDRs) for its members. A blog posted on Wednesday by the Fund’s managing director, Kristalina Georgieva, disclosed that the executive board had discussed an allocation equivalent to $650 billion and that she anticipates the completion of the process by end-August. SDRs are issued to members by the Fund and are a reserve asset that can be exchanged for a convertible currency with a central bank.
“At this stage we do not know the size of the new country allocations. If, hypothetically, Nigeria’s was to be its current quota, the accumulation would be about $3.50 billion, FBNQuest states.
Georgieva also hoped that richer nations would agree to “voluntary channelling” of their allocations to the “poorest and most vulnerable states”, which could, in conjunction with other steps, amount to an additional transfer of up to $100 billion. Whether Nigeria qualifies is highly debatable, given that it is not classified as low income.
A third source, the report notes, would be soaring revenue from oil exports. The crude price for UK Brent is comfortably above $70/b and yet reserves have continued to decline. The abandonment of OPEC+’s last meeting is open to many interpretations, the most negative being that it marks the loss of the discipline of the alliance that has underpinned the price over the past 12 months. Alternatively, Saudi could rebuild its relations with the UAE.
A fourth would be the release of multilateral loans to Nigeria, such as the World Bank’s mooted $1.5 billion credit. Conditionality rears its head in this case and we urge caution.
FX has been in short supply under Covid-19, and Nigerians have made limited use of their education, health and business travel allowances due to restrictions on movement both at home and in their favoured destination countries.
On the return of normality (whatever shape it takes), they will make good use of these allowances, the net deficit on services will rise strongly and the import cover will deteriorate.
At the last Monetary Policy Committee meeting, the CBN governor, Godwin Emefiele, while speaking on the decline in external reserves, said, “This reflects sales to the foreign exchange market and third-party payments.”
The CBN, in its January economic report, said, “As a consequence of the lower foreign exchange receipts, the official external reserves declined.
“External reserves stood at $35.44 billion at the end-January 2021, a decrease of 2.8 per cent and 3.5 per cent from $36.46 billion in December 2020 and $36.73bn in January 2020.”
