Nigeria’s foreign reserve fell further Friday, to below $35 billion, as the Central Bank continues to defend the naira amid declining dollar revenues.
The reserve which serves as firepower for the CBN to prop the naira fell to $34.97 billion, the lowest since May this year, according to CBN data.
The decline adds to the need for Africa’s biggest economy to boost dollar earnings which is necessary to spur investors’ confidence in the economy which slipped into its second recession in five years this year.
“There is a need for increasing the reserves as more of it is better than less”, said Bismarck Rewane, CEO, at Lagos-based Financial Derivatives Company although it hasn’t gotten to panic proportions yet.
“Reserves are meant to be used when the need arises and the need is here now, as we need to use the reserve to increase the supply of FX, and stabilize the market. What was happening before was some rationing which wasn’t good. At current levels, the reserve cover is still adequate and I don’t think it calls for panic at this time,” Rewane said.
Hit by the pandemic that triggered a sharp fall in both oil and non-oil revenue, Nigeria is in the midst of a foreign exchange crisis that has forced the apex bank to devalue the naira three times this year.
Aside from oil and non-oil sources, the country has also been hard-hit in all other areas where it attracts dollars, from diaspora inflows down to portfolio and direct investments.
Despite a three-time devaluation, speculators still believe that Nigeria’s naira is still very much overvalued, trading for N383 to a dollar at the Investors and exporters window, a 20 percent discount compared to the N475 which the greenback is sold at the parallel market.
Courtesy of the fall in petrodollars owing to the pandemic, Nigeria’s reserve has been on a free fall since the beginning of the year, and it was not until April when Africa’s biggest economy tapped the International Monetary funds for an emergency loan to cushion the impact of the pandemic, that the reserves got some facelift.
“You will expect pressure on the reserve because at this point, a lot of foreign currency transaction happens at year-end which increases the demand for the dollar. When the demand outweighs the supply you will have pressure on the reserve,” Yinka Ademuwagun, research analyst at, United Capital said.
Nigeria’s external reserve is a closely watched benchmark for a lot of reasons. The first being that it gives the apex bank from having enough buffers to defend the naira and cover for the country’s huge imports bills. An increasing external reserve suggests a higher inflow from crude oil sales, foreign investor inflows and other external loans.
At the start of the year, the reserves stood around $38.5 billion and fell to under $36 billion in the days leading to the lockdown. It later touched $33.4 billion in May before rising to above $36 billion when the IMF disbursed the $3.4 billion emergency funds to Nigeria. It has remained stuck at above $35 billion since July.
A sharp drop below $35 billion could send the signal to the forex market that devaluation is imminent to help prop up the naira, analysts told Businessday.
A $1.5 billion World Bank loan which could have served as a relief to boost the country’s reserves has been greeted with a persistent delay with the global lender noting last week that it has to see more in terms of reforms before the loans can be approved.
Although the World Bank loan would go a long way in boosting Nigeria’s reserve, analysts say the $1.5 billion loans is too little to put the country’s which has more than $759 million as unmet dollar obligation, in a much comfortable situation.
The economy slipped into its deepest recession since the 80s after contracting by for two consecutive quarters in the second and third quarter of the year. Nigeria’s trade balance has largely been unfavourable since the fourth quarter of 2019 when import outpaced exports, resulting in a trade deficit of N579 billion.
In the first quarter of the year, the trade deficit was reduced to N421.2 billion before skyrocketing to N1.8 trillion and N2.4 trillion in the second and third quarter of 2020 respectively.
In order to attract more dollar inflow, the CBN softened the rules on Diaspora Inflows, allowing for the inflows to be withdrawn in dollars and sold in any of the markets including the Black Market.
While the move is expected to boost reserves, analysts say unification of the exchange rates which has served as a deterrent to investors; and a raise of interest rates above inflation to attract portfolio investors would go a long way in helping the reserves.
