The country’s external reserves have maintained its upward trend in recent days as it increased to $36.304 billion on January 14, from $36.262 billion on January 13, latest statistics posted on the Central Bank of Nigeria (CBN)’s website have shown.
This means that between December 30, 2020 when they stood at $35.319 billion and January 14, 2021, the external reserves have gained $985.2 million. In fact, New Telegraph’s analysis of the CBN’s data shows that since December 17, 2020, when it dropped to $34.825 billion from $34.837 billion on December 16, the reserves had steadily risen to $35.356 billion on December 30 before declining to $35.319 billion on that same day.
The reserves’ current upward trajectory is in sharp contrast with how the CBN’s foreign exchange buffers fared for most part of last year, when they generally headed south due to the sharp drop in the price of crude oil (the commodity that accounts for about 90 per cent of Nigeria’s export earnings) and the impact of coronavirus crisis.
For instance, while the external reserves stood at $38.5 billion in January last year, it had dropped to $33 billion three months later as the price of oil, for the first time in history, turned negative on April 20, 2020, occasioned by a sharp plunge in demand, which was triggered by COVID-19 lockdowns across the world.
Although the foreign exchange buffers increased from $33.52 billion as of April 30, 2020, to $36.59 billion as of May 29, 2020, due to the $3.4 billion in emergency support that Nigeria obtained from the International Monetary Fund (IMF) to help tackle the effects of the pandemic, surging demand for forex, coupled with low foreign capital inflows into the Nigerian economy, resulted in the reserves ending 2020 at a lower position compared to their level in the beginning of the year.
Specifically, findings by New Telegraph show that the external reserves dropped by $2.71 billion from $38.07 billion as of the end of 2019, to $35.4 billion as of December 30, 2020. Analysts attribute the in- crease in the reserves in the last few weeks to the recent increase in the price of oil occasioned by the distribution of COVID-19 vaccines in some of the world’s advanced economies.
According to data obtained from CBN’s website, the price of oil increased from below $50 per barrel as at December 2020 to $55.48 as of January 11, 2021. Analysts point out that the gradual increase in the level of the reserves gives CBN enough firepower to defend the naira, which has been under pressure for most part of the year.
New Telegraph recently reported that as part of its efforts to ensure a stable exchange rate, CBN sold foreign exchange amounting to $18.35 billion to authorised dealers between January and September last year.
The figure was 62 per cent ($11.37 billion) less than the $29.72 billion that the regulator sold to authorised dealers in the corresponding period of 2019. In his address at the Annual Bankers Dinner organised by the Chartered Institute of Bankers of Nigeria (CIBN) in Lagos on November 27, CBN Governor, Mr. Godwin Emefiele, said that at $35 billion, the country’s external reserves were sufficient to cover seven months of imports of goods and services.
Analysts point out that while CBN insists it remains committed to achieving its objective of exchange rate unification (something the World Bank and IMF have long been calling for), the official exchange rate of the naira to the dollar on the apex bank’s website remains N379/$1 compared with N394.64 per dollar and N475/$1 on the Investors and Exporters’ (I&E) window and the parallel market respectively.
Indeed, in his Lagos Business School (LBS) Executive Breakfast Session presentation for December 2020, the Chief Executive Officer, Financial Derivatives Company (FDC) Limited, Mr. Bismarck Rewane, predicted that the external reserves will likely keep declining as CBN strives to keep the naira stable.
According to him, while convergence of the naira will continue, “unification is unlikely.” However, in a report released at the weekend, Fitch Ratings predicted that Nigeria’s external reserves would rise to $42 billion in 2021.
The global credit rating agency hinged its forecast on its expectation that Brent crude would average $53 per barrel, compared to the $43.1 per barrel recorded in 2020. It also anticipates that CBN would allow further depreciation of the official naira exchange rate over the course of 2021, notwithstanding improved terms of trade and foreign exchange reserves.
Fitch stated: “Naira lost 8.2 per cent of its value against the dollar in 2020 and we expect the CBN to allow the official naira exchange rate to depreciate further over the course of 2021, notwithstanding improved terms of trade and foreign exchange reserves.
“Given rising oil prices in 2021, we expect forex reserves to rise to an average of around $42 billion in 2021 (around eight months of import cover), compared to $36 billion in 2020. However, this will not negate the impact of persistent depreciatory pressures on the naira, notably as a result of rising dollar demand driven by the domestic economic recovery.”