The Federal Government is projecting that the country’s external reserves will rise to $35.77 billion in 2022 and also record a growth rate of 5.99 per cent, data from the 2022-2024 Medium Term Expenditure Framework and Fiscal Strategy Paper (MTEF&FSP) recently released by the Budget Office of the Federation shows. According to Central Bank of Nigeria (CBN), the external reserves stood at $33.10 billion as at July 15, 2021. New Telegraph’s analysis of the 2022-2024 MTEF&FSP shows that government is also expecting the reserves to climb to $36.77 billion and $37.76 billion in 2023 and 2024 respectively.
However, government is projecting that average exchange (N/$) will remain stable at N410/$1 for the next three years. Given that crude oil accounts for about 90 per cent of Nigeria’s export earnings, government noted that developments in the international oil market could pose a challenge to monetary policy and outlook for the economy. Specifically, it stated: “The medium- term outlook of crude oil price remains uncertain, given the complex interaction of political and economic factors in the global space. In the event of adverse shock that leads to a plunge in the crude oil price below US$50/barrel, the achievement of some of the targets may be at risk.
“Overall, within the review period (2022 -2024), the stance of monetary policy would be cautious to enable the Bank (CBN) to consistently anchor expectations and prevent market agents from overly engaging in speculative activities in response to the major existing shocks – COVID-19 and oil price. “Consequently, the primary objective of monetary policy would remain striking a balance between supporting the recovery of output growth while maintaining stable price development across inflation, exchange rate and market interest rate.” Following the sharp drop in the price of oil, as well as the impact of the COVID-19 crisis, the external reserves have been under pressure in the last eighteen months, resulting in a weakening of the naira. In fact, CBN had predicted last year that the sharp drop in oil prices would lead to a decline in the external reserves.
In a report titled: “Monetary, Credit, Foreign Trade and Exchange Policy Guidelines for Fiscal Years 2020/2021,” the apex bank stated: “Sequel to COVID-19, the viability of the external sector in 2020 is expected to deteriorate, given the present worsening current account balance and depletion of external reserves driven, largely, by decelerating export receipts, particularly oil.
“Specifically, the degree of external reserves accumulation is expected to decelerate, as outflows are expected to outweigh inflows. “As a result, external reserves are expected to lie between $29.9 billion and $34.3 billion at end-December 2020 (predicated on current declining oil price between $20 and $40).” Also, in its January 2021 Economic Report, CBN said: “As a consequence of the lower foreign exchange receipts, the official external reserves declined. External reserves stood at $35.44 billion at end-January 2021, a decrease of 2.8 per cent and 3.5 per cent from $36.46 billion in December 2020 and $36.73 billion in January 2020. “At that level, the external re-serves position could cover 6.1 months of import for goods and services and 8.2 months of import for goods only,” it added. The apex bank’s data also shows that the reserves dropped by $1.1 billion in February, falling from $36.19 billion on February 1 to $35.09 billion on February 26. Similarly, the reserves lost $178 million in March, dropping from $34.99 billion on March 1 to $34.82 billion on March 31.
Indeed, although the external reserves briefly headed north in mid-April, rising to $35.254 billion as of April 16, between then and May 27, the reserves lost $1.008 billion. This is despite oil prices rebounding to close to $70 per barrel in recent months. The decline continued in June as the reserves fell by 2.5 per cent month-on- month ( MoM) to $33.37 billion on June 29. Analysts believe that the recent surge in oil prices has not triggered a significant increase in the external reserves because CBN has been clearing the huge backlog of forex demand in the market, which stood at $2 billion as at September 2020.
According to the communiqué issued at the end of the two-day meeting of CBN’s Monetary Policy Committee (MPC) in May, “the committee noted the external reserves declined marginally to $34.17 billion as at May 21, 2021, from $34.29 billion as at end-April 2021. This reflects sales to the foreign exchange market and third-party payments.” New Telegraph had reported earlier this year that the apex bank sold foreign exchange amounting to $21.18 billion to authorised dealers between January and November last year. However, the figure is $13.40 billion less than the $34.58 billion that the regulator sold to authorised dealers in the corresponding period of the previous year.