Nigeria’s foreign reserves to shrink further as debt servicing, imports mount pressure on FX

As the Nigerian economy gradually opens up after disruptions caused by Covid-19 pandemic, experts are of the opinion that the accumulated demand for foreign exchange (FX) for imports, debt servicing, among others, may cause further decline in foreign reserve that dropped to $36.1 billion in July.

According to the Central Bank of Nigeria (CBN), foreign reserves dipped from $36.6 billion to $36.1 billion between May 29 and July 9, as a result of increased demand for foreign currency alongside a fall in supply associated with the decline in the price of oil, which is Nigeria’s main source of foreign exchange earnings.

Speaking with BusinessDay, experts say the foreign reserve position may worsen as Covid-19 pandemic eases off and countries open up borders for travels and imports, schools resumption as well as debt servicing, which will obviously lead to increased demand for FX, thereby exerting more pressure on reserve.

Obadiah Mailafia, a former deputy governor of the CBN, says the demand for FX is already high as businesses that are gradually opening up can barely access letter of credit from banks, adding that pressure is likely to increase as Nigeria government is paying so much to service debt.

Mailafia stresses that the decline in foreign reserves at this time should trigger a more proactive measure in financial resource management, as not so much revenue is expected from the dwindling oil prices.

“There is need for us to be very watchful, careful and vigilant at this time as we are beginning to see pressure on the demand for FX coupled with decline in oil prices, which may continue for some time.

“There is need for the government to be more proactive in managing the financial resources, build more investor’s confidence as well as address the issue of banditry that scare investors,” he states.

Factors that often drive the foreign reserves are oil prices, travels, and if our level of imports commences fully, it will bring more pressure on the foreign reserve, he says.

Nigeria has since collected an unprecedented $3.4 billion loan from the IMF, and the CBN in trying to comply with critical conditions given by the lender has begun moving the official exchange rate towards the Investors and Exporters (I&E) window as naira further weakens amid less FX inflows.

Muda Yusuf, director-general, Lagos Chamber of Commerce and Industry (LCCI), in response to a question, states that the decline in foreign reserves, particularly as earnings remain low on poor oil prices, is of great concern. Yusuf foresees increased demand for FX in coming months, which could then lead to further drop in reserve.

He says efforts should be heightened to stimulate policies to attract foreign currencies and investments into the country so as to increase overall resilience to shocks.

“With the pressure from accumulated demand, there are chances that the reserve may decline further, and this is a concern for us already.

“At this time, there is need for us to develop policies to attract more foreign currencies, manage the exchange rates, and stimulate favourable policies for those in imports and exportation businesses and Nigerians in diaspora,” he notes.

Speaking with BusinessDay, Aliu Hassan, an Abuja-based economist, says the importance of ensuring adequate level of reserve in times like this where nations are faced with economic crisis cannot be overemphasised.

“Recording decline in reserve even though it is expected is not so good for our economy at this time, considering the decline in oil price and the nation’s overall revenue base.

“We may see more decline as economic activities and interactions between countries commence,” Hasan says.

Speaking further, he stresses on the need for sound reserve management policies and practices to support, but not substitute for, sound macroeconomic management in order to provide a cushion to absorb unexpected shocks.

“Going forward, there is an urgent need for sound reserve management policies and practices to ensure stability in our reserves at this time.

“As we know, in most cases, reserves are used to intervene in the FX market to influence the exchange rate, payment for the importation of goods and services, as well as to service external debt.

“Again, it is also used to manage the exchange rate through intervention in the FX market and help build international community confidence in the nation policies and creditworthiness. So, any decline should be of concern to any government and should be given adequate attention,” he notes.