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‘Flight resumption may worsen external reserves depletion’

N

igeria’s dwindling external reserves will likely come under more pressure when domestic and international flights fully resume, analysts at Financial Derivatives Company (FDC) have said.

 

 

The analysts stated this in its latest, “Economic Monthly” publication, obtained by New Telegraph yesterday.

 

 

As part of its gradual relaxation of Coronavirus (Covid-19) lockdown restrictions, the Federal Government  said that domestic flight operations could resume as from  last Wednesday at the Muritala Mohammed as well as the Nnamdi Azikiwe airports in Lagos and Abuja respectively.

 

 

The government also stated that airports in Kano, Port Harcourt, Owerri and Maiduguri could resume operations on July 11, while domestic flights at other airports would resume on July 15. 

According to the government, date for resumption of international flights will be announced in due course.

 

 

While the reopening of the airports, which had been shut since March 23, which is expected to boost economic activity, the FDC analysts predicted that the development is likely to accelerate external reserves depletion.

 

 

They said: “The depletion rate of the reserves level is expected to intensify especially as domestic and possibly international flights resume.”

 

Impacted by the Coronavirus crisis and the sharp drop in the price of oil (the commodity that accounts for about 90 per cent of Nigeria’s export earnings), the country’s external reserves have been on a downward trend in recent times.

 

 

Data obtained from the Central Bank of Nigeria (CBN), for instance, shows that the external reserves declined by $400million in June to $36.20billion. The reserves further dropped by $51million to $36.13billion between June 30 and July 9.

 

 

“A fall in external reserves will affect the stability of the exchange rate and the CBN will continue to adopt forex rationing measures to meet rising forex demand pressures,” the analysts said.

 

 

They pointed out that although oil prices were likely  to head north in the near term due to the extension of output cuts by OPEC and its allies, “the price gains could be capped by Nigeria’s impending production cuts as the country is more sensitive to oil production than price.”

 

“This will negatively affect the country’s fiscal and external buffers.  …We expect external sector vulnerabilities to persist. External reserves will continue to decline (falling below $36bn) and naira could come under pressure due to increased demand,” the FDC analysts stated.

 

 

In addition, they noted that while the naira is likely to remain relatively stable in the near term amid CBN’s weekly forex sales of $100million, the apex bank’s “ability to intervene could be limited by the continuous depletion of the external reserves.”

 

 

 

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