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Oil prices rise yet Nigeria’s external reserves down

FG’s subsidy payment rises 10 times faster than oil prices

Brent crude prices above $60 per barrel mean strong Foreign Exchange (FX) reserves. As of 6.15 pm on Tuesday, Brent crude (ICE) stood at $71.89 per barrel.

But the rise in the price of crude oil has not reflected in accretion in FX reserves, as Nigeria’s external reserves have declined by 3.16 percent to $34.104 billion as of June 7, 2021, from $35.218 billion as of April 19, 2021, data from the Central Bank of Nigeria (CBN) show.

The reason for this, according to Johnson Chukwu, managing director/CEO, Cowry Asset Management Limited, is that 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 (Q1) 2021.

Chukwu explains that the total value of export of Africa’s biggest oil producer is now less than its total value of import. He says the benefits of the $70 would come subsequently and not immediately.

Nigeria is not producing up to capacity because of OPEC’s restrictions. Its production in the first quarter of this year averages 1.7 million barrels per day and that includes about 300,000 condescends per day. In effect, crude production is not as huge as it used to be when the country was doing more than 2 million.

“When you talk of crude production, some of them are going into swap, and remember that you are also spending money to import refined petroleum product, which is why it is flushing into your balance of trade. As long as your balance of trade remains negative, your reserves will continue to be under pressure, he notes.

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The news that the price of Brent crude has risen through the $70.00/bbl mark is good for some (e.g. government oil revenues) and bad for others (e.g. fuel prices).

Oil and gas account for some 80 percent of Nigeria’s exports and upwards of 60 percent of government budget revenues, according to a report by Coronation.

High oil prices, combined with sustained production, support the Federal Government’s finances and the foreign exchange reserves of the CBN.

Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited, says the CBN has been working hard to meet the demand for FX in order to achieve economic growth.

According to Coronation, the relationship between oil prices and production on the one hand, and the reserves of the CBN on the other, is complicated. Oil is sold at forward, not spot, prices; Nigeria’s gas is sold at contracted, not commodity, prices; and oil is exchanged for fuel in swaps. So, accurately determining oil and gas revenues is not easy. And the CBN’s FX reserves are influenced by other factors, including the government’s foreign borrowing and how many US dollars the CBN supplies to the foreign exchange markets at any given time. (For example, the CBN supplied some $1.0bn per month to Nigeria’s FX markets during the second half of 2019.)

Taiwo Oyedele, head of tax and corporate advisory services at PwC, states that although crude oil prices have recovered from their low points induced by the COVID-19 pandemic, it is yet to reflect materially on Nigeria’s external reserve. This is partly due to the production volume being less than budget in addition to the decline in other sources of foreign exchange earnings including foreign direct investment (FDI), foreign portfolio investment (FPI), diaspora remittances and non-oil exports.

Without an improvement in balance of payment and restoration of investors’ confidence, the continuing decline in external reserve will lead to further devaluation of the naira and attendant consequences.

“On a related note, the high crude oil price will translate into higher pump prices of petroleum products, which will either be passed on to consumers or increase the current subsidy cost with the former capable of driving up inflation and the latter further reducing revenue available for FAAC allocations,” Oyedele says.

On his part, Uche Uwaleke, professor of capital market and president, Capital Market Academics of Nigeria, says demand for forex by far outstrips supply. The recent NBS report on foreign trade indicated a trade deficit of over N3.9 trillion in Q1 2021. By implication, imports exceeded exports. To make matters worse, foreign investments inflows, which practically dried up in the wake of COVID’19 pandemic, have yet to pick up.

The implication, he says, is grave for exchange rate and the value of the naira. The recent upward adjustment of the official Exchange rate by the CBN in a bid to unify it with the AFEX rate is intended to increase investments and Diaspora remittances.

“But this has been wrongly interpreted by speculators to mean that further naira devaluation is in the offing. Not a few Nigerians now demand the US greenback as a store of wealth, a situation exacerbated by the worsening insecurity in the country,” Uwaleke states.

Nigeria’s currency on Tuesday weakened by 0.10 percent as the dollar was quoted at N411.50k compared with N411.07k quoted on Monday at the Investors and Exporters (I&E) forex window, data from the FMDQ indicated.

At the Bureau De Change (BDC) segment of the foreign exchange market, and parallel market, the naira steadied at N500/$ and N502/$, respectively.

The daily foreign exchange turnover declined by 58.51 percent to $62.79 million on Tuesday from $151.37 million recorded on Monday.