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Ahead of a scheduled $1.7 billion foreign currencies (FX) backlog payment, Nigeria has seen its external reserves drooping for the third week amidst a sustained decline in the foreign receipts from crude oil exports.
In an update in June 2022, the World Bank projected that FX Reserves will fall as the Central Bank of Nigeria is expected to clear $1.7 billion worth of FX backlog and FX forward contracts to foreign investors by the end of October 2022.
Data from the Central Bank of Nigeria (CBN) shows that for the third week in a roll, the nation’s external reserve has dropped to $38.49 billion from $3.7 billion.
The decline reported in the past three weeks has been aided by worsening prices of crude oil and Nigeria’s slower production volume.
Brent crude oil prices fell 3.3% to $87.06 per barrel litre amidst uncertainties in the global markets. In a week, Nigeria’s reserves inched lower by $162.89 million.
Despite heavy reliance on hydrocarbon revenue, Nigeria records no significant benefits from the oil windfall that follows global economic recovery after the pandemic lockdown.
Global demand for oil was strong with higher prices across crude grade rising. Unfortunately, Nigeria’s production volume has been underperforming at an average of 1.2 -1.3 million barrels per day.
Recently, production volume dropped below one million barrels per day, according to the latest report from the Organisation of Petroleum Exporting Countries and allies (OPEC+).
As a member of the oil group, Nigeria has a 1.8 million barrels per day crude oil production quota. However, the nation’s market supply has consistently below the OPEC+ quota, thus losing revenue.
In a report, Cowry Asset analysts said they believe the judicious execution of the CBN’s ‘RT200 FX Scheme’ and the continued incentivization of international money transfer operators (IMTOs) through the ‘Naira4Dollar Scheme’ policy on FX repatriation will in the long run help attract inflows of foreign exchange into the economy
In July 2022, Nigeria’s gross external reserve was on positive accretion back to $40 billion after hitting more than 6 months low to around $38 billion in the month.
At the start of the year, Nigeria’s gross external reserve was at $40.5 billion but it dropped rapidly, shedding $1.2 billion to $39.34 billion in the first week of July after reaching a 2022 low so far at $38.42 billion at the start of June 2022.
Gross reserves swing despite healthy oil prices. Nigeria’s bonny light crude had traded above $110 per barrel but the weak oil production capacity coupled with low investments in infrastructures exerts negative impacts on inflow.
Nigeria’s daily oil production averaged 1.42 million barrels in May 2022.
Then, OPEC announced a new target of 27,000 daily barrels higher than the approved quota in June after its upgrade of Nigeria’s daily production to 1.79 million barrels from the initial 1.77 million daily barrels.
As Nigeria’s major sources of foreign exchange – oil exports, non-oil exports, foreign direct investments (FDI), and diaspora remittances – continue to witness a decline in the face of growing pressure on the Naira in the FX market.
The reserves which have depleted to almost 10 months low since November 2021 still limit the apex bank’s ability to defend the naira at the official window.
In July 2022, it was reported that the CBN has defended the local currency by more than $3 billion since April without any impact on the parallel market where the rate is rocketing to N650 per dollar.
Analysts said they see accretion of the external reserves hampered by exchange rate pressures if there is, perhaps, no timely and appropriate intervention by the apex bank to defend the naira across various FX windows.
Also, the World Bank said in the update that Nigeria would experience net portfolio outflows in 2022 due to the hawkish monetary policy seen in developed countries.
In the update, World Bank said foreign portfolio investment (FPI) inflows into Nigeria grew significantly in 2021, exceeding US$6 billion, an equivalent of 1.4 per cent of the nation’s gross domestic product.
This followed a significant decline in 2020 in the wake of the COVID-19 pandemic when net outflows reached US$3.6 billion (0.8per cent of GDP), the multilateral lender said in the update.
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