Nigeria’s External Reserves Plunged Despite Intensified Intervention

The Central Bank of Nigeria (CBN) increased intervention in the foreign exchange market not withstanding, Nigeria’s external reserves depreciated by $866.2 million or 2.26 per cent in October 2022 to $37.39 billion from $38.255 billion it opened in the month under review.

In just 10 months, the nation’s foreign exchange buffer has depreciated by $3.13 billon or 7.73 per cent from $40.5 billion to $37.39 billion as of October 31, 2022.

Analysts attributed the decline in external reserves to increasing intervention by the CBN bank in SMIS, and Investors & Exporters (I & E FX) windows to stabilise the naira exchange rate, lamenting the dwindling inflow from crude oil, among others.

They said the crisis in Niger-Delta relating to oil theft and dwindling production has impeded the external reserves growth despite increase in global oil prices.

Speaking, the CEO, Wyoming Capital and Partners, Mr. Tajudeen Olayinka said the decline is an indication of limited or inadequate accretion to external reserves.

According to him, “We know that the only major contributing source to foreign reserves is crude oil exports, and since Nigeria is not able to meet her Organization of the Petroleum Exporting Countries (OPEC) production quota, it follows therefore, that external reserves will suffer such level of inadequacy.

“It also confirms inadequate inflow from foreign investors (FPI (portfolio) and FDI (direct)) due poor exchange rate management and multiple macroeconomic headwinds, while the urge to import raw materials and finished goods from other countries rages unabated.”

Analyst at PAC Holdings, Mr. Wole Adeyeye added that, “The dwindling crude oil production and continuous intervention by the CBN in the official market might have contributed to the drop in external reserves in October.

“The bulk of our foreign exchange earnings come from the oil sector. However, Nigeria has not been meeting its OPEC crude oil production quota due to the oil theft and pipeline vandalism.

“In addition, the continuous intervention by the CBN in the official market to maintain stability of the local currency might have contributed to the setback recorded in external reserves during the period.”

The Vice President, Highcap securities Limited, Mr. David Adnori said the numerous interventions by CBN is affecting external reserves, stressing that not meeting OPEC quota also another factor.

He forecasted further plunge in external reserves as the CBN tends to defend the local currency with its plan to redesign Naira notes.

According at analysts at Cordros Research, “Although the CBN has enough liquidity to support the foreign exchange market over the short term, we highlight that foreign inflows are paramount for sustained foreign exchange liquidity over the medium term.

“Moreover, considering the tepid accretion to the reserves given the: low crude oil production level and elevated PMS under-recovery costs, FPIs that historically supported supply levels in the I & E FX window will be needed to sustain foreign exchange liquidity levels in the medium to long-term.

“Hence, we think: further adjustments in the NGN/USD peg closer to its fair value and flexibility in the exchange rate would significantly attract foreign inflows back to the market.”

The external reserves in September had dropped by $740.26 million or 1.9 per cent to $38.28billion amid apex bank’s $265 million intervention to airlines operating in the country to settle outstanding ticket sales.

The CBN had released a sum of $230 million as special foreign exchange intervention, while another sum of $35 million was released through Retail SMIS auction.

Emirates, among other foreign airlines operating in Nigeria had withdrawn their services in the face of unremitted funds for outstanding sales of tickets.

However, the external reserves in January was hovering at an average of $40 billion and later slide to $39 billion in three months (February- April) consecutive before reaching $38 billion in May 2022.

The data released by CBN revealed that it remained flat at $38billion in June and eventually closed at $39.16billion on June 30, 2022.

The external reserves throughout September was still at $38 billion but dropped to $37 billion in October.

The CBN in its Second quarter (Q2) economic report said the international reserves remained above the benchmark of three months of import cover.

According to the CBN, “The international reserves were $39.22 billion at end-June, 2022, relative to US$39.28 billion at end -March 2022. The external reserves could cover 7.2 months of import for goods and services or 9.1 months of import for goods only.

“A breakdown of the external reserves by ownership shows that, the share of CBN was $37.98 billion (96.85 per cent); Federal Government, $1.20 billion (3.06 per cent); while the Federation accounted for the balance of $0.04 billion (0.09 per cent). In terms of currency composition, the US dollar was $30.06 billion, (76.6 per cent); Special Drawing Rights $5.05 billion (12.9 per cent); Chinese Yuan $3.65 billion (9.3 per cent); GB Pounds, $0.22 billion (0.6 per cent); Euro $0.25 billion (0.6 per cent); and other currencies accounted for the balance.”

The decline in external reserves also reflected in crude oil price in October 2022. Daily crude oil, according to the CBN, started October 2022 at $97.31 per barrel and dropped to $96.81 per barrel.