"Why Nigeria is still experiencing forex scarcity despite high oil prices"

" \n Brent crude oil reached $71 last week as it headed to a second consecutive week of gains on signs of a recovery in demand from the United States to Europe, increasing optimism among producers with OPEC+ confirming its plans to ease the production cuts by 840,000 barrels per day (bpd) in July. \n \n\n \n Although oil prices have ticked upwards in the last four months, Nigeria still has a crunching forex crisis. Oil accounts for 90% of Nigeria\u2019s foreign earnings, so why has the country\u2019s currency crisis worsened? \n \n\n \n The answer lies in simple economics. \n \n\n \n Demand and Supply \n \n\n \n Demand has outstripped Nigeria\u2019s supply of forex. The scarcity and negative sentiments have also reduced confidence in the FX market. The transactionary, precautionary and speculative demand for money have outweighed the liquidity of foreign currencies in the country. Nigeria, which spent $53 billion on importation in 2020 with imported refined oil accounting for $8 billion in the same year, has shown that its high reliance on imports is unsustainable. \n \n\n \n Dollars leaving the economy has a negative ripple effect on the forex market. For instance, the latest passport scarcity was attributed to the passport production company struggling to access dollars from the CBN. \n \n\n \n Businesses and manufacturers that require foreign expertise and equipment are scrambling for dollars for their operations. Fuel importers bringing in petroleum products are in need of dollars. Airlines have blamed the increase in airfares on dollar scarcity. Foreign investors seeking to repatriate funds are trapped in this crisis as well and are joined by Nigerians planning immigration and studies abroad who need forex for tuition fees. \n \n\n \n Speculators and dollar-mongers are adding to the currency craze as the black market rates have deviated from the \u201cCBN reality.\u201d Hoarding is the order of the day and people are selling their naira assets for foreign currencies in anticipation of further devaluation. \n \n\n \n \n \n\n \n Furthermore, with the forthcoming general elections in 18 months, the political industry which gazumps foreign exchanges would bring on additional pressure to the liquidity crisis. As a result of intense politicking, r ecent trends \u00a0show that Nigerian elections have a negative effect on the foreign exchange market. \n \n\n \n Prior to the 2019 elections, foreign portfolio investors pulled out as they sensed election uncertainty. Their activities affected the value of the Naira. Investors lost about N 729 billion \u00a0during that period. \n \n\n \n We are in a period where everyone is a buyer, and no one is a seller. Why aren\u2019t there any sellers? What\u2019s happening on the supply side? \n \n\n \n A few weeks ago, it was reported that Nigeria has been\u00a0 struggling t o sell some of her oil. The current feeling about Nigerian crudes is that of weakness. Three possible reasons to explain the situation. \n \n\n \n They are: \n \n\n \n Strong competition from usual rivals and US cargoes; \n \n\n \n Covid relapse in India; and \n \n\n \n The lukewarm recovery of European markets. Despite oil prices being in the $62-$71 range for the past four months as seen in the chart below, it is not reflecting in the country\u2019s liquidity. \n \n\n \n \n \n\n \n An overview of NNPC\u2019s official selling prices for May 2021 shows that the Petroleum Corporation dropped its main export streams \u2013 Bonny Light , Brass River, Erha, Qua Iboe \u2013 by 61-62 cents per barrel from their April 2021 prices, with them amounting to -0.9, -0.8, -0.65, -0.97 USD per barrel against Dated Brent. \n \n\n \n Nigeria\u2019s oil is facing stiff competition from the US and other oil-producing countries. With China drawing stock from inventory as is their usual tactic to depress oil prices, there is competition for buyers among sellers. As most oil-producing nations are gradually increasing their output, there is an expansion of light sweet crudes available to buyers and refiners in Asia or Europe. \n \n\n \n The Covid situation has reduced demand for Nigeria\u2019s oil from its number one buyer, India. Last year, 17% of Nigerian crude exports went to India, equivalent to 300kbpd on an annual average basis. Nigerian oil producers will struggle to maintain those levels of crude exports. \n \n\n \n Our second top buyer, Spain, just like the rest of Europe, is still struggling to revive its economy to pre-pandemic levels. It was reported in March 2021 , that only one Escravos Suezmax cargo left the loading terminals of Nigeria for Spain; which is a stark contrast to the 9.2MMbbls loaded in January. This links back to the competition with US, Caspian and North African grades. It appears Nigeria is losing this battle. \n \n\n \n Light at the end of the tunnel? \n \n\n \n Notably, the FX market has been hamstrung by weak FX management policies alongside economic saboteurs profiting from the market inefficiencies through round-tripping and arbitrage. \n \n\n \n With the Central Bank of Nigeria (CBN)\u00a0 officially adopting \u00a0the Nigerian autonomous foreign exchange (NAFEX) rate which weakened the naira by 8 percent to N410.25\/$1, the CBN has shown that it is attempting to be on the same wavelength with the \u201cmarket-determined\u201d rate. \n \n\n \n Nigeria needs strong FX liquidity which can only come from crude sales (which is tepid) or borrowings. President Buhari, in a letter to the Senate, has said the country plans to raise the sum of $6.183 billion from a \u2018combination of sources\u2019 as it sought approval for the debt raise. \n \n\n \n The government also plans to issue $3 billion or more in Eurobonds at international capital markets according to a report from\u00a0 Reuters. \u00a0There is still talk of a loan from the World Bank. Whatever the outcome \u2013 Nigeria needs supply, the foreign exchange market needs liquidity, Nigerians need dollars. \n "

"Why Nigeria is still experiencing forex scarcity despite high oil prices"

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