Why Nigeria’s external reserves is stuck at $35 billion
Nigeria’s external reserves remain stuck at just above $35.7 billion, according to data from the central bank for the week ended September 10th, 2020.
Nigeria is in the midst of a foreign currency crisis that has led to multiple devaluations in March, July, and in August 2020. Pressure from the World Bank has also led to a unification of the exchange rate, which is now between N380 and N386/$1.
However, despite the pressure on the exchange rate and the decision by the CBN to resume sales of forex to the BDCs, forex reserves remain just above $35.
Forex reserves at the beginning of the year was $38.5 billion and fell to under $36 billion in the days leading to the lockdown. Since then, external reserves have fallen to $33.4 billion before rising to above $36 billion when the IMF disbursed loans to Nigeria. It has remained stuck at above $35 billion since July,
Nigeria has awaited a $1.5 billion loan from the World Bank, which is viewed as critical to releasing forex to meet the demand of foreign investors waiting on the sidelines to repatriate their funds. Pent up demand is thought to be around $2 billion, depending on who you read.
Why reserves remain static: The CBN relies heavily on oil sales to shore up its external reserve position.
But with oil prices hovering just above $40 and Nigeria’s crude oil output down to 1.4 million barrels per day, dollar inflows have remained short of expectations.
The government reported a 50% drop in revenues in the first half of the year.
Foreign portfolio investments in the country have also crashed. According to data from the NBS, Foreign Inflows fell to $1.29 billion compared to $5.8 billion.
Foreign investments into the money market also fell drastically from $3.4 billion in Q1 2020 to just $323 million.
The CBN attracted significant inflows of forex between 2017 and 2019, offering high-interest rates as an incentive to foreign investors to keep their money in the country.
Why this matters: Nigeria’s external reserve is a closely watched benchmark for a lot of reasons.
It helps determine how much forex Nigeria has to meet its import requirements.
A sharp drop below $35 billion could send s signal to the forex market that another devaluation is imminent to help prop up the naira.
In contrast, an increasing external reserve suggests a higher inflow from crude oil sales, foreign investor inflows and other external loans such as the world bank loan.
Nigeria’s current account deficit is also negative, meaning that the CBN will likely keep the reserves at these levels until government external revenue sources improve.
Impact on forex: It appears the CBN is not immediately disposed to selling forex to meet demand at the NAFEX window until it receives a significant inflow of forex. This confirms how important the World Bank’s loan is to provide a temporary fix to Nigeria’s exchange rate challenges.