CBN may be swimming against the tides this year if they refuse to devalue Naira after the Nigerian foreign external reserves slid for the 6th consecutive month in December 2019. In the last 6 months, the reserves has now declined by $6.46b from $45b in June 2019 to $38.6b at year end 2019.
Nigeria’s external reserves has now declined by $9.2b since reaching a 5 year high of $47.8b in May 2018 (almost enough to pay P&ID $9.6b settlement charge). The significant drop in the reserves can be traced to the decline in crude oil prices which dipped from a high of $84 in October 2018 to $66 as at market close on Tuesday as Nigeria continues to suffer from its overreliance on crude exports to grow its external reserves.
Foreign exchange reserves are cash and other reserve assets held by a central bank or other monetary authority that are primarily available to balance payments of the country, influence the foreign exchange rate of its currency, and to maintain confidence in financial markets.
A sinking foreign external reserves is very disastrous for a country seeking foreign exchange rate stability as a loss of confidence in the country’s ability to carter for its import obligations and meet foreign debt obligations as and when due usually leads to a currency devaluation to regain some form of stability.
At an investor meeting in London, Godwin Emefiele, governor of the Central Bank of Nigeria (CBN), told foreign investors that the apex bank would meet all foreign exchange demands so long as the nation’s external reserves are above $30 billion and the international prices of crude oil do not go below $45 per barrel.
While $45 brent crude oil price is well below even the most bearish crude oil price forecasts, Nigeria’s external reserves falling below $30b is looking like an increasing possibility.
Based on the current pace of the depletion of the external reserves by at least $1b monthly, Nigeria’s reserves may slip below $30b by September 2019 if there are no new foreign debt issues to replenish the reserves. An oil price rally could also provide support for our external reserves but the oil price outlook isn’t supportive of any rally in the near term.
US Energy Information Administration (EIA) forecast brent crude oil price to average $61/b in 2020. JPMorgan forecast a slightly higher price of $64.5/b which are both below current oil price of about $66/b.
As the external reserves continues to decline, Nigeria must either find a way to increase crude oil production and exports significantly enough to cover the monthly $1b shortfall in foreign exchange demand or devalue her currency for the first time in 4 years to discourage growing import demand.
IFEANYI JOHN
