Nigeria’s foreign reserves closed the year 2019 at $38.6 billion, according to Central Bank of Nigeria. This is its lowest level in 24 months.
In the last quarter of 2019, the external reserves suffered daily average decline of about $52.5 million, meaning the country was depleting more than $50 million daily from its reserves in the fourth quarter of 2019.
The external reserves only saw one day of gain in the entire fourth quarter when they grew by a meagre $5.8 million on November 13, in what could be described as the worst quarter for the country’s external reserves in 2019.
The growth in external reserves gradually began to lose steam earlier in the year before it finally turned negative in the second half of the year.
In Q1 2019, the average daily external reserves growth was about $20.8 million, but growth slowed to a daily average of about $11.25 million in Q2, before the depletion began in Q3 when daily reserves loss was about $51 million.
The drastic fall in the external reserves could jumpstart speculative demand in dollars as investors anticipate the almost inevitable devaluation of the local currency, analysts told BusinessDay.
“If this trend (on external reserves) continues to persist, we will begin to see pressure on the naira because investors will begin to speculate in acquiring more dollars – and we are even seeing that a lot. Then for the foreign investors, we will begin to see more outflows from their side,” Ayodeji Ebo, managing director, Afrinvest Securities Limited, told BusinessDay.
“To solve this problem, we should see how we can begin to encourage Foreign Direct Investments (FDI) so that we can have permanent capital. The FDI can help in further opening some major sectors. For example, the Petroleum Industry Bill (PIB), if it is passed as soon as possible, will attract much investment and once you get that much capital, it will create some stability in the FX market,” he said.
Analysts opine that a speculative frenzy on the dollar could lead to devaluation this year. However, the continued decrease in Nigeria’s exportation could help ensure that the next devaluation is not as deep as it was in 2016.
“On the outlook for FX reserves, I feel it may still go down a bit but not significantly because factors like importation of rice and poultry foods have reduced drastically and the demand that comes from these items is going to reduce,” said Ayodele Akinwunmi, corporate banking department at FSDH Merchant Bank Limited.
“And if we go into next year, when Dangote refinery will come on stream, you will realise that 25 percent of demand for foreign exchange will reduce and as we begin to ramp up increased local capacity to produce those goods that we used to import before, there will drop in their demand and we can even scale up to a point that we can export them and be able to generate additional foreign exchange which will lead to increase in those foreign reserves,” Akinwunmi said.
However, not all analysts expect a devaluation to occur in the near term. Some analysts were quite optimistic that the CBN can raise interest rate to attract more foreign portfolio investors to the country.
“The risk of potential devaluation in the currency has certainly increased. However, I still think the Central Bank of Nigeria (CBN) will try to manage the currency and keep it stable in the short term,” said Gbolahan Ologunro, an equity research analyst at Lagos-based CSL Stockbrokers.
“To achieve that goal, they will have to increase the rate on Open Market Operations (OMO) bills to compensate Foreign Portfolio Investors (FPIs) for the higher risk on putting their money in the OMO market so that they can use that to solve the reserves and sustain stability in the exchange rate,” Ologunro said.
What all analysts can agree on for now, however, is that the continued decline in the external reserves is bad for the FX market and the CBN must find a way to curtail the reserves’ downward spiral to avoid a devaluation this year.
BUNMI BAILEY & IFEANYI JOHN
