Nigeria’s external reserves, which represent the country’s stock of foreign currency, have reached a 22-month high of $37.31 billion, reflecting significant foreign inflows into Africa’s largest economy.
However, they have failed to make a real impact on the faltering naira, which was adjudged one of the 10 worst performing currencies in the world by Bloomberg on September 20.
The reserves serve as a crucial measure of the nation’s ability to meet international financial obligations and stabilise the local currency.
Data from the Central Bank of Nigeria (CBN) reveal that as of September 18, 2024, the reserves hit the highest level since November 4, 2022, when they stood at $37.36 billion. This marks a notable recovery in Nigeria’s foreign currency position.
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On a year-to-date basis, the country’s reserves surged by 12.99 percent, or $4.29 billion, from the $33.02 billion recorded at the start of the year on January 2, 2024.
Several factors have contributed to the increase in external reserves. Key sources of the inflows include: the federal government’s domestic dollar bonds, which attracted foreign investment; remittance inflows from Nigerians abroad; multilateral loans from international organisations; and foreign portfolio investments.
Ayokunle Olubunmi, head of financial institutions ratings at Agusto Consulting, said the major driver is the domestic dollar bond.
“It’s primarily the domestic bond proceeds. The uptick in diaspora remittance and portfolio investments also supported the surge.”
When compared year-on-year, Nigeria’s foreign reserves grew by 12 percent, adding $4.03 billion to the $33.28 billion recorded on September 18, 2023.
The federal government raised over $900 million from investors through the issuance of $500 million, the first series of the $2 billion domestic US dollar bond aimed to stabilise the economy.
West Africa’s largest economy recorded $553 million in remittances in one year, between July 2023 and July 2024, according to the CBN.
Other inflows into the country’s economy within the period include: $3.3 billion AfreximBank oil facility, and $2.25 billion from the World Bank Group.
The rising external reserves, which empower the CBN to defend the local currency, have not translated into naira appreciation. Despite the growing reserves, the naira has depreciated by 49.56 percent per dollar in the official foreign exchange (FX) market over the review period.
Read also: Remittances flow show up in external reserves but naira lose
According to data from FMDQ Securities Exchange Limited, the naira declined from N776.60 on September 19, 2023, to N1, 539.65 on September 18, 2024 in the Nigerian Autonomous Foreign Exchange Market (NAFEM), previously known as the Investors and Exporters (I&E) forex window.
In the parallel market, often referred to as the black market, the naira also lost 41.87 percent (N695) to the dollar, falling from N965 on September 19, 2023 to N1,660 on September 18, 2024, based on data from street traders and various online platforms.
Muda Yusuf, CEO of Centre for the Promotion of Private Enterprise, said: “There is a serious confidence crisis in the foreign exchange market fueling an unprecedented speculative onslaught on the naira.”
Olayemi Cardoso, governor of the CBN, noted in February 2024 that the exchange rate in Nigeria has fluctuated due to the simultaneous occurrence of two factors: a decline in the supply of US dollars coinciding with a surge in demand.
He noted the growing number of Nigerian students studying abroad, saying over the past decade, foreign exchange demand for education and healthcare has totaled nearly $40 billion.
Personal Travel Allowances (PTAs) have accounted for a total of $58.7 billion during the same period. Notably, between January and September 2019, the CBN disbursed $9.01 billion to Nigerians for PTAs, he said.
The foreign exchange inflows through the economy surged by 57 percent in one year following consistent policies by the CBN.
Data from the CBN showed that Nigeria recorded $8.86 billion in FX inflow in February 2024, higher than $5.66 billion in the corresponding period of February 2023.
The CBN’s economic report for February 2024 noted that new investments into the economy increased significantly to $1.24 billion, compared with $0.33 billion in January 2024.
Read also: External reserves record marginal decline after retail dollar sales
Foreign direct investment inflow rose to $0.06 billion, from $0.03 billion in the preceding month. Portfolio investment inflow increased to $0.80 billion from $0.12 billion, following rising returns on money market instruments and bonds. Similarly, other investment capital, mainly loans, rose to $0.37 billion, from $0.18 billion in the preceding period.
FBNQuest stated in a report that the international reserves position of both Egypt and South Africa, the two countries it tracks, have been on an upward trend in recent months.
While Egypt’s international reserves saw a modest increase of $108 million month-on-month (m/m) to about $46.6 billion in August, South Africa’s external liquidity position increased significantly by $976 million m/m to $60.1bn.
“Looking ahead, we expect proceeds from the recent auction of foreign currency denominated bonds to result in much-needed FX liquidity into the economy, providing support for the Naira in the near-term,” it said, while analysing Nigeria.
“However, addressing the security issues in the oil sector and raising the nation’s crude oil production from its current low level remains the most viable long-term source of foreign exchange accretion to the country’s external reserve,” FBNQuest added.
The Federal Government is poised to secure a new loan from the World Bank, with an anticipated approval for loans totaling $1.7 billion. This approval is expected to take place on September 26, 2024. It is expected to increase the amount of inflows into Nigeria.
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