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Nigeria’s external reserves dip in Q1 2022 amidst spike in crude oil prices

Nigerian Navy to inspect offshore oil loading to curb theft

According to the data from the Central Bank of Nigeria (CBN) on the daily reserves movement, Nigeria’s foreign exchange reserves dipped $973.78 million quarter-to-date in 2022. The foreign exchange reserves which stood at $40.52 billion at year end 2021 has now plunged to $39.55 billion at the end of its first quarter. The same data shows that Nigeria lost $827.34 million in Q1 2021 which is a $144.01 million decline when compared with Q1 2022.

On December 22, 2021, Nigeria’s parliament set and approved a budget of N17.13 trillion for 2022, anchored on an oil price benchmark of $62 per barrel. Oil exports contribute significantly to Nigeria’s external reserves.
Due to disruptions in the global energy sector, crude oil prices have been trending upwards and should have also affected the value of external reserves. The crude, against which Nigeria’s oil is priced, Brent, skyrocketed to $100 per barrel on 7th of February and hit $139 per barrel on 8th of March. Since Nigeria is a member of the Organization of Petroleum Exporting Countries (OPEC), the nation’s external account is expected to benefit from the fluctuations in the crude oil prices.

The pattern of Nigeria’s external reserves has been characterised with ups and downs for the past decade. For instance, the gross external reserves stood at $44.18 billion in 2012, but declined to $43.61 billion in 2013, and further to $34.47 billion in 2014. It declined again to $29.06 billion in 2015 and dropped even further to $25.84 billion in 2016 but improved to $38.76 billion in 2017 and $43.17 billion in 2018. Its value declined in 2019 to $38.60 billion in 2019 and even further in 2020 to $35.37 billion. External reserves shot up again to $40.52 in 2021.

Source: CBN, BRIU.

At the end of 2021, crude oil was priced at $76 per barrel whereas $40.52 billion was recorded as external reserves. The price of crude oil fluctuated for the first week of 2022 from $80 per barrel up to $84 per barrel.
On a week by week analysis, external reserves declined for the same week to $40.49 billion. Crude oil prices increased the following week from $84 per barrel to $88 per barrel by that week end. The value of external reserves increased at the beginning of the following week, to $40.50 billion but declined to $40.47 billion by the end of the week producing a loss of $20 million within the first two weeks of the year.

Read also: Oil traders to cut purchase of Russia’s crude from May

As the global crude oil price declined to $90.89 per barrel at the beginning of the third week, external reserves fell to $40.17 billion and experienced changes till the end of the week, after which its value rose to $40.31 billion. However, by the end of the month, the volume dropped to $40.03 billion. This analysis shows that the total volume lost from external reserves by the end of January was $481.36 million.

In February, oil prices were also unstable. It fell at its highest on 24th of February to $104/b due to the Russia-Ukraine crisis. Nigeria’s external reserves were at $39.42 billion the same day, after starting out with $40.03 billion at the beginning of the year. Within the first two weeks, Nigeria had already lost $190.08 million and by the end of the month, the country lost $175.74 million, after gaining to its external reserves, resulting to a loss of $657.11 million within two months into the year.

The value of external reserves at the beginning of March was $39.86 billion. By the end of the month, external reserves had gained $7.5 million, which took it to $39.87 billion. Crude oil prices rose drastically in the same month from $114/b at the beginning of the year, with the lowest price being $110.13 per barrel.

The global oil prices reached a record high in the month of March as oil and gas costs continue to soar amidst fear of a global economic shock from Russia’s special military operations in Ukraine. Further analysis of the CBN data shows that daily crude oil price increased to $110.13 per barrel by the end of the month from $80.07 per barrel in 2022. The growth in crude oil prices shows that Nigeria was earning excess amount of money daily but amidst the increase in prices, external reserves did not show the same level of improvement.

The Group Managing Director/CEO of NNPC Limited, Mele Kyari, recently disclosed that Nigeria’s oil production crashed to 1.15 million barrels per day due to rising cases of oil theft and pipeline vandalism in the Niger Delta. This has been responsible for the deteriorating production and a major contributing factor impacting on external reserves growth on the backdrop of increase in global oil prices. Another contributing factor is the increasing CBN’s intervention in the foreign exchange market.

A professor of economics from the University of Benin, Hassan Oaikhenan, blamed the mismanagement of the nation’s economy to dwindling external reserves in the first quarter of 2022. He stated that Nigeria is already heavily indebted, therefore the earnings from crude oil are consumed by debt repayments. While other countries are benefiting from the hike in crude oil prices due to Russia-Ukraine conflict, Nigeria’s case is different.
Since external reserves are very much important to a country’s economic growth and has positive and significant relationship with

Gross Domestic Product (GDP) both in the short and long runs, the implication of the dwindling external reserves means that it will be difficult to attain steady and growing economy. For sustained economic growth, stakeholders should formulate policies that would enhance the increment and sustainability of Nigeria’s foreign reserves and most especially, achieve steady and favourable exchange rate.

Wole Adeyeye, an analyst with PAC Holdings, was reported to have said that: “With the recent efforts of the government to fight oil theft and pipeline vandalism in the country, we may likely see a slight improvement in the country’s foreign reserves in Q2 2022.”
CBN projected that the reserves may surpass $42 billion by mid-2022 based on sustained increase in crude oil prices, the impact of Eurobond issuance, and the stable exchange rate regime. If the reserves had remained consistent, the projection could be possible but it is going to be challenging to attain the said amount with what the country has lost in just three months into the year.