External reserves not adequate given dwindling oil prices
The naira’s recent appreciation against the dollar may be shortlived as the Central Bank of Nigeria (CBN) does not currently have the capacity to sustain its interventions in the foreign exchange markets, analysts at CSL Research have said.
The local currency, which has been under pressure on the parallel market since the beginning of the year, due to foreign exchange scarcity occasioned by slump in price of oil, started to rebound last Tuesday, strengthening from N477 per dollar to N440/$1 as at last Friday.
The development was triggered by the apex bank’s announcement that it would resume the sale of dollars to BDCs (which was suspended in March due to the suspension of international flights and other coronavirus containment measures announced by the Federal Government) on September 7.
Commenting on the CBN’s resumption of forex interventions in a note obtained by New Telegraph yesterday, the CSL Research analysts said that while resumption of forex interventions by the regulator is a welcome development for businesses and foreign investors who have remained trapped in the country unable to repatriate their investments, they were not optimistic that the interventions would be sustained due to the uncertain outlook for Nigeria’s oil earnings and its impact on the country’s forex reserves, among other factors.
Specifically, the analysts said: “We remain pessimistic on the ability of the CBN to sustain interventions at the different windows of the foreign exchange market. Our pessimism is hinged on a number of factors. First, we note that the external reserve position of the CBN is not a significant war chest to sustain market liquidity in the face of dwindling oil earnings.
“The nation’s gross reserves was $36.2 billion (as at 7 September 2020) which is close to pre-2015/2016 FX crisis level of c.$30.0 billion. With oil earnings expected to remain weak in the coming months, we do not expect any significant growth in reserves save from any form of USD debt issuance. In addition, the country’s external trade position remains precarious with a trade deficit of N1.8 trillion ($4.7bn) recorded in Q2’20.