Naira falls as external reserves decline by $3.4bn

Naira fell against the dollar across foreign exchange (FX) markets on Friday as pressured external reserves declined by $3.42 billion all through 2022.

At the close of trading on Friday, Naira lost 0.04 percent as the dollar was quoted at N461.67 compared to N461.50 quoted on Thursday at the Investors and Exporters (I&E) forex window, Nigeria’s official FX market.

The local currency depreciated by 0.27 percent (N2) to N742 per dollar on Friday as against N740 on Thursday at the unofficial market, popularly called the black market.

Nigeria’s external reserves, which gives the Central Bank of Nigeria (CBN) the firepower to defend the Naira, declined by 8.44 percent year-on-year to 37.08 billion as of December 30, 2022 from $40.50 billion recorded at the beginning of 2022, data from the CBN indicated.

“As shown in our chart, the trend in gross official reserves was downward through 2022,” analysts at FBNQuest said in a new report.

Read also: Naira gains 26.24% in one week despite external reserves decline

Foreign exchange inflow from crude oil sales, the main source of FX accretion to the official reserves, was essentially non-existent last year, the report stated.

Godwin Emefiele, governor of the Central Bank, had in November 2022 said the official foreign exchange receipt from crude oil sales into Nigeria’s official reserves has dried up steadily from above US$3.0 billion monthly in 2014 to an absolute zero dollars.

He noted that the Nigerian foreign exchange market was in the middle of a serious crunch which are straining the reserves and stifling the value of the naira.

Total reserves as at the end of December 2022 covered 8.4 months of merchandise imports on the basis of the balance of payments for the 12 months to June 2022, and 6.4 months when added services.

However, “for a more accurate picture, we must adjust the gross reserve figure (and the import cover) for the pipeline of delayed external payments,” the analysts said.

According to the report, despite the demand pressure on the naira exchange rate, the CBN was able to keep the naira relatively stable on the official market. This was mostly accomplished by means of FX supply rationing.

The naira lost just about 9 percent of its value against the US dollar last year, despite the US Federal Reserve’s significant interest rate rises. This is in contrast to the performance of most other currencies around the world, the report stated.

The report noted that the Egyptian Pound depreciated by 36 percent against the US dollar, last year. The Ghanaian Cedi capitulated even more by over 60 percent.

“Going forward, we expect that the downward pressure on the external reserves will result in a marked adjustment to the currency this year,” the analysts said.

FBNQuest sees the gross official reserve balance at about USD36bn by the end of 2023. The modest decrease relative to the end of 2022 levels is mostly due to the gradual improvement in oil production following a step-up by the security agencies. The Federal Government (FG’s) proposal to eliminate fuel subsidies by June 2023 will also be supportive, the report stated.