Why Nigeria’s external reserves continue to decline
Nigeria’s gross external reserves have continued to decline, dropping by $1.1 billion to $38.5bn in May 2022, data from the Central Bank of Nigeria (CBN) indicated.
The latest decline according to a new report by FBNQuest is the largest since February 2021 and follows a modest accretion of about $33m in April.
“To put the extent of the decline into perspective, the reserves fell by an average of about $450m for the five-month period to Mar 2022,” analysts at FBNQuest said.
The current external reserves position showed it had declined to $38.4 billion as of June 7, 2022, data from the Central bank revealed.
In its last meeting in March 2022, the Monetary Policy Committee (MPC) noted the decrease in the level of gross external reserves to $39.44 billion as of March 17, 2022, from $40.21 billion on January 25, 2022, indicating a decrease of 1.95 percent during the review period.
One of the reasons for the external reserves decline according to the report is due to the exit of foreign portfolio investors (FPIs) from Nigeria.
Portfolio investments, which declined by -2 percent Year-on-year (y/y) but grew by 49 percent Quarter-on-Quarter (p/q), accounted for the majority (61%) of total capital imports into the country $958m.
“The CBN’s data series on FX flows through the economy is lagged. Consequently, it will take a few more months before we know what drove the significant m/m decrease in the official reserves,” the analysts said.
Apart from the exit of PFIs, other reasons for external reserves attrition are coupon payments (adjusted for $150m in May) on Nigeria’s sovereign Eurobonds in May, other debt service costs, and a possible increase in the CBN’s interventions at its multiple windows.
The only other likely explanation is the possible settlement of the CBN’s FX swaps during the month, the analysts added.
“The combined effect of low crude oil production which is below our OPEC quota as well as the rising cost of petrol subsidy has resulted in Nigeria incurring virtually more cost to import fuel products than what we earn from exporting crude oil,” Taiwo Oyedele, head of tax and corporate advisory services at PwC, said in February 2022.
The implication he said was that rather than benefit from rising oil prices, instead the country is bleeding with a huge implication for government revenue and foreign exchange reserves which in turn escalates exchange rate risk and budget deficit.
“Government must urgently reverse this worrying trend by addressing challenges to crude production and the lingering petrol subsidy quagmire,” he said.
“Following dwindling receipts from crude oil sales due to low oil production levels, concessional loans from multilateral agencies with stringent conditions appear to be the only likely source of accretion to Nigeria’s official reserves in the near term,” the analysts said.
Total reserves at end-May covered 9.2 months of merchandise imports per the balance of payments (BoP) for the 12 months to September 2021, and 7.0 months when added imported services. The cover has deteriorated materially from levels in recent months, the report noted.
“For a fuller picture, we must adjust these figures for the pipeline of delayed external payments, which is now difficult to quantify because the CBN has addressed some of it.”
Egypt’s official reserves decreased by about $1.6bn to about $35.5bn in May, primarily because of external debt service repayments comprising mainly of Eurobonds and IMF loans.
South Africa’s official reserves fell by almost $200m to $54.4bn. The liquid position includes gold reserves of $7.5bn but is adjusted downward for FX deposits and forward swap transactions.
The drop in the country’s international liquidity position is mainly attributable to the decline in gold price during the month.
