Nigeria’s external reserves have in the last one year lost 10.52 percent ($4.15 billion) following declining foreign exchange (FX) inflows through oil sales and other sources.
Africa’s largest economy’s foreign exchange reserves dropped to $35.28 billion as of May 4, 2023 from $39.42 billion on May 4, 2022, data from the Central Bank of Nigeria (CBN) showed.
The downward trend in the country’s external reserves is attributed to reduced FX inflow into the economy and increased demand pressure on the gross official reserves.
“The decline in external reserves implies that the rate of inflow of FX through crude oil proceeds and other sources like foreign portfolio investment and foreign direct investment have continued to plummet while the utilisation of the FX by the CBN increased,” said Ayodeji Ebo, managing director/chief business officer, Optimus by Afrinvest.
He said the decline is despite reduced sales of FX to the banks and companies. The continued decline will put a lot more pressure on the CBN, which will lead to more rationing and further adjustment of the FX at both the official and parallel markets.
The naira has continued to depreciate at the Investors and Exporters, Nigeria’s official foreign exchange market, falling 9.71 in the last one year to N463 per dollar currently from N418/$1 as of May 4, 2022.
The foreign exchange pressure continued at the parallel market where naira depreciated by 23.44 percent to N738 per dollar as of last Thursday, compared to N565/$ in 2022.
Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise, said the external reserves are declining because inflows are not good enough.
He said: “We are not getting enough or a satisfactory level of inflows. Our inflows come from crude oil exports; we normally enjoy inflows from FDI, which has dried up because of some issues, especially the FX policy. FPI is also another major source and because of FX policy, it has also dried up.
“Now you have export proceeds; again because of FX policy, many of the export proceeds are not coming through the right channel because many of the exporters are complaining that they are not ready to give their foreign exchange at N460 per dollar. So the policy environment is not encouraging inflows. Basically, it is a policy problem and oil production problem.”
In its April 17, 2023 note, FBNQuest noted that Nigeria’s gross external reserves declined by almost $1.2 billion month-on-month to $35.5 billion as at March 31, 2023.
It said the reduction was one of the sharpest in recent months and compares unfavourably with a decrease of about $317 million in February 2023, the report stated, adding that Nigeria’s external reserves have not been this low since mid-September 2021, making this a 19-month low.
“Although the reserves have been under pressure due to rising demand from various categories of FX end-users, we believe its significant decrease in March was primarily due to debt-service payments, which typically peak in the first quarter of the year,” analysts at FBNQuest said.
Total reserves as at the end of March 2023 covered 7.0 months of merchandise imports on the basis of the balance of payments for the 12 months to September 2022 and 5.4 months when services were added.
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Official naira is expected to fall to N500 per dollar as Nigeria’s external reserves, which stood at $37.21 billion as of January 17, 2023, is projected to decline to $34.9 billion at the end of 2023, according to the Nigerian Economic Summit Group (NESG).
The decline in the official forex reserves will be driven by the CBN’s intervention in the forex market and shortage in forex inflow at the end of 2023.
In 2022, the country’s external reserves declined by 8.2 percent to $37.1 billion from $40.5 billion at the start of the year.
NESG’s 2023 macroeconomic outlook report stated that the decline in forex supply will further support exchange rate depreciation.
It said an FX shortage will support the black market operation, where the exchange rate will depreciate even at a faster rate.
