Nigeria’s external reserves have witnessed a significant decline, falling by 11.55 percent, which amounts to a loss of $4.28 billion since the start of the year.
The Central Bank of Nigeria (CBN) has reported that the reserves stood at $33.78 billion as of December 20, 2023, a stark contrast to the $37.06 billion recorded on January 3, 2023.
The persistent depletion of the foreign reserves is attributed to a combination of factors, including reduced revenue from crude oil sales and a heightened demand for foreign exchange (FX).
Nigeria, an economy that is largely dependent on oil exports, has seen its oil revenue diminish amidst fluctuating global oil prices influenced by geopolitical events and market dynamics.
Consequently, the Nigerian naira has experienced a consistent decline in value against the US dollar, exacerbated by a growing demand that far exceeds the available dollar supply.
This economic pressure has led to a depreciation of the naira/dollar exchange rate by 125.55 percent, or N578.70, at the Nigeria Autonomous Foreign Exchange Market (NAFEM), the platform previously known as the Investors’ and Exporters’ (I&E) forex window.
The CBN’s data reflects the challenges faced by Africa’s largest economy as it grapples with external sector vulnerabilities.
The government and financial authorities are likely to continue monitoring these developments closely, seeking measures to stabilise the economy and manage the foreign exchange market pressures.
The dollar was quoted at N1,039.63 as of December 22, 2023, as against N460.93 quoted in the year’s first quarter, data from the CBN indicated.
At the parallel market, also known as the black market, the naira weakened by 62.16 per cent as the dollar was sold for N1,200 as of December 25, 2023, compared to N740 at the beginning of the year.
“We envision that, with discipline and focused commitment, foreign exchange reserves can be rebuilt to comparable levels with similar economies,” said Yemi Cardoso, governor of the CBN at the Chartered Institute of Bankers of Nigeria’s (CIBN) bankers dinner.
According to the CBN’s most recent data on external reserves, Nigeria’s gross official reserves fell by $392 million month-on-month (m/m) to $33.0 billion in November 2023.
The decline implies that the gross external reserves have depleted by about $4.1 billion over the 11 months to November 2023, indicating an average monthly depletion rate of $371 million, according to a report by FBNQuest.
In addition to demand pressure from the CBN’s interventions on the foreign exchange market, a secondary factor responsible for the marked decrease is coupon payments on Nigeria’s Eurobonds, totalling roughly $149m during the month.
According to the report, total reserves at the end of November 2023 covered 7.7 months of merchandise imports based on the balance of payments for the 12 months to June 2023 and 5.7 months when added services.
“However, for a more accurate picture, we must adjust the gross reserve figure for the pipeline of delayed external payments and the encumbered portion of the reserves.
“As shown by our chart below, the external reserve position of South Africa and Egypt, the other two markets we track on the continent, improved m/m,” analysts at FBNQuest said.
South Africa’s international liquidity position, which comprises its gross reserves, gold reserves, and forward positions, is netted off for some less liquid portion of the reserves, increased by $809m m/m.
The m/m rise was attributed to higher gold prices, foreign currency valuation adjustments, and asset price fluctuations.
Egypt’s external reserves saw a modest increase of $70 million to $35.2 billion. Notably, these reserves have shown a steady recovery, rebounding from a sharp decline in 2022 attributed to challenges in the balance of payments.
The new CBN leadership has begun addressing the structural issues with the FX policy, starting by clearing some of the FX backlog.
“Looking forward, we expect that recent international engagements by the government will result in much-needed foreign exchange liquidity into the country,” the analysts said.