New Telegraph

External reserves shrink by $444.13m in two weeks

Despite higher crude oil prices, the nation’s external reserves dropped by $444.13 milion between April 21 and May 5, 2022, latest data from the Central Bank of Nigeria (CBN) shows. According to the apex bank, the external reserves, which stood at $39.81 billion on April 21, maintained a downward trend to fall to $39.37 billion on May 5, 2022. In its latest report on Nigeria, one of the big three credit rating agencies, Fitch Ratings, had stated that higher global oil prices would drive an improvement in the country’s external liquidity and support near-term economic growth. The agency, however, added: “These improvements are balanced against high hydrocarbon dependence, which leaves Nigeria vulnerable to negative oil price shocks and structurally low domestic revenue mobilisation.”

Fitch said: “Nigeria’s gross international reserves have been bolstered by higher oil export receipts, which will continue in 2022. We forecast reserves to increase to $43 billion in 2022, up from $40.5 billion at end-2021. “We estimate that the combination of oil exports and remittance inflows helped to bring the current account (CA) into balance in 2021 after a deficit of 4.2 per cent of GDP in 2020.

“Our baseline assumption is for the CA balance to remain broadly unchanged in 2022, but sustained higher oil prices at their present level of S112 per barrel could widen the 2022 current account surplus to four per cent of GDP, with upside to Nigeria’s international reserves.” Also, New Telegraph recently reported analysts at Financial Derivatives Company Ltd (FDC) as projecting that the Nigeria’s external reserves would continue to head north in the near term as a result of the surge in the price of oil, the commodity that accounts for about 90 per cent of the country’s forex earnings. The analysts stated: “Nigeria’s gross external reserves gained by 0.10 per cent to $39.74 billion in April 14 from $39.70 billion in March 15. Gross external reserves also gained by 0.51 per cent so far in April. The increase is largely driven by higher oil prices.

“The gross external reserves are expected to increase in the near term as oil prices remain high, albeit moderately due to the country’s sub-optimal oil production. This will support CBN’s capacity to increase forex supply to the foreign exchange market, thereby stabling the currency.” However, in another report issued late last month, the FDC analysts, citing what they described as the country’s “lingering suboptimal production” of crude oil, said they expected Nigeria’s export proceeds to remain low this month despite higher oil prices occasioned by the Ukraine war.

The analysts stated that operational challenges such as pipeline vandalism and oil theft will continue to hinder efforts toward boosting the production of crude oil, adding that the expected low export proceeds will negatively affect Federal Government revenue this month as well as the country’s external reserves position. As the analysts put it, “oil prices are expected to continue its upward trend in the near term as the Russian invasion of Ukraine persists. However, if weak demand from China persists owing to the re-imposition of lockdown as COVID-19 cases surges, we could see the rise in oil price slow.

“All the above notwithstanding, we do not expect Nigeria to benefit significantly from higher oil price owing to lingering suboptimal production. Pipeline vandalism, oil theft and operational challenges continue to dampen efforts toward ramping up oil production. “This implies that oil revenue and export proceeds are expected to remain low which will negatively impact the external reserve position and government revenue.” However, commenting on the weakening of the naira at the parallel market, in the last few weeks, a development, forex traders attributed to the external reserves’ downward trend, the analysts said they expected the local currency to remain stable at the Investors and Exporters’ (I&E) fx window albeit in the short term as higher oil prices will enable the CBN to continue to supply the official foreign exchange market.

The analysts stated: “(on) outlook in the I&E window, the naira is projected to remain relatively stable in the near term, trading between the band of N416.50/$- N417/$, as CBN continue to supply the foreign exchange market following the higher oil prices.

“However, demand pressure in the parallel market is expected to linger, which will further depreciate the naira. The naira is projected to trade around N588/$ and N590/$ in the parallel market.” According to industry watchers, the recent slide in the external reserves is the result of CBN’s increased forex supply to the official forex market.

Traders said that rising demand for the greenback at the parallel market has resulted in the weakening of naira in that segment of the forex market. New Telegraph gathered at the weekend that traders expect naira to further weaken at the parallel market in the coming week as increased political spending ahead of month-end election primaries will negatively impact the local currency. Naira traded at N589 per dollar last Thursday at the parallel market, recovering from a record low of N590/$1. Traders also believe that a stronger dollar could hurt naira. For instance, Murega Mungai of African currency broker, AZA, stated in a note that “with the U.S. Federal Reserve lifting interest rates by half a percentage point, its biggest hike in more than two decades, we expect there will be increased pressure on naira in the near term.”

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