Nigeria faces import crisis as reserves hit 13-month low
Nigeria’s economy could be leaning against the wind as the country’s external reserves fell to a 13-month low last week, tumbling quickly to $30 billion, the level it was between 2015 and 2017.
Last Thursday, the figure slid to $33.79 billion, as it
dropped by $30 million. This represented a 0.09% decline compared to $33.824
billion recorded on Wednesday, June 16. A total of $1.58 billion has been lost
in reserves year-to-date, while month-to-date loss stands at $405.33 million,
hardly reflecting the marginal gains in rising oil prices in recent months.
The reserves fell by $222.3 million between May 31 and June
10 to $34.0 billion, according to figures published by the Central Bank of
Nigeria. The last time it fell below that mark was between June and July of
2017.
The country’s forex reserves continues to trend downwards
despite the positive rally recorded in the global crude oil market, with Brent
crude currently trading at $73.5 per barrel. It has sustained a steady
troubling decline in the past two months after a short-lived upswing that took
it to $35 billion.
The foreign reserves lost $120.18 million last Tuesday, the
highest single-day loss recorded since February 22, 2021.
This is largely attributed to the decline in crude oil
sales, due to the effect of the COVID-19 pandemic on the buying capacity of
India, which is one of the world’s largest importers of oil.
However, reports suggest that India’s oil imports are
beginning to pick up after months of lessened activities due to the pandemic’s
effect on its economy. This also comes as good news to Nigeria as India remains
one of the highest importers of Nigeria’s crude oil.
The falling reserves, experts have warned, could leave the
country’s embattled economic outlook worse off as the confidence of foreign
investors is partly influenced by the size of the reserve. At the height of the
COVID-19 pandemic, the figure oscillated between $34 billion to $36 billion and
even crossed $36.5 billion occasionally.
Nigeria’s current reserve is among the poorest of the
oil-producing countries. For instance, it is less than 10 per cent of that of
Saudi Arabia, world’s leading oil-producing nation, in nominal terms. The real
disparity is even wider when the populations and import values of the two
countries are compared.
With a population of 35.3 million, Saudi Arabia’s foreign
exchange (FX) reserve per capita is over $12,000 while Nigeria’s is about $169,
though the imports of the Arab nation far outweigh that of Nigeria with its
2019 yearly imports standing at $144 billion as against Nigeria’s $55 billion.
Other oil-producing countries such as Kuwait, Libya, United
Arab Emirate (UAE), Iraq, Iran and Qatar are ahead of Nigeria in both real and
nominal reserves.
With respective forex reserves values of $54.1 billion and
$40.3 billion respectively, South Africa and Egypt, which are Nigeria’s
regional economic rivals, are way ahead in nominal terms. Interestingly, the
two countries are not near Nigeria in terms of population and growth in
imports, implying that they have given Nigeria a much wider margin in real
terms.
On a global scale, Nigeria currently ranks 53rd as the
country has dropped further down Morocco and Kazakhstan, whose reserves were
previously below Africa’s biggest economy.
Nigeria’s romance with a nose-diving foreign reserves began
in August 2008 (at a time the country’s import was less than what it is today)
when it hit an all-time high of about almost $64.8 billion.
Data by the National Bureau of Statistics (NBS) revealed
that the country’s import value as of quarter one (Q1) of this year was N6.85
trillion (or $16.7 billion). This suggests that the current reserves can only
fund six-month imports, which Bode Ashogbon, an investment consultant and
economist, said would put enormous pressure on the monetary authority’s
capacity to stabilise the troubled naira.
As experts raised concern over the slide of the external
reserve last year, the Governor of the Central Bank of Nigeria (CBN), Godwin
Emefiele, allayed fears, saying the amount could sustain seven-month imports.
Notwithstanding the CBN boss’ assurances, analysts have cautioned that
unforeseeable market risks, especially as underscored by COVID-19, call for
larger external reserves.
Coming at a time Nigeria is battling with her reserves,
India’s hit an all-time high of $605 billion earlier in the month, providing an
import cover of about 15 months. Yet, the intellectual community of the Asian
country is kicking as they feel the amount does not provide a sufficient
buffer.
Their argument is understandable as the current reserve of
its regional rival, China, can clear import bills of 16 months while Japan has
enough to last 22 months. Those of Russia and Switzerland are enough for imports
of 20 and 39 months respectively.
As at last September, India’s holding in external currencies
could only cover 17 months’ import, a reason the country’s economists are not
impressed with the recent growth in the nominal figure.
The CBN, which operates a managed float, periodically
supports naira from the reserves, and a lower reserve is expected to affect the
value of the currency, which closed on Friday at 412 to the dollar.
Foreign exchange reserves are assets held on reserve by a
monetary authority in foreign currencies, quite often used to back liabilities
and influence monetary policies. They could be in the form of foreign
banknotes, deposits, bonds, treasury bills and other foreign government
securities.
Oil revenue constitutes about 60 per cent of Nigeria’s
revenue and 90 per cent of Nigeria’s source of foreign exchange earnings, even
though it accounts for just nine per cent of the nation’s GDP.
Oil prices have been relatively stable recently, with Brent
price selling above $70 per barrel.
External reserves, historically, had been an increasing
function of oil prices. But for the first time, the country’s reserve in dollar
is falling while the oil market is bullish.
Reacting to the daily slump in external reserves, a former
deputy director of the Central Bank, Stan Ukeje, told The Guardian that the
situation could have been worse if there were no ban on importation of certain
items classified under the prohibition list.
He also explained that the oil prices might not have
positive impact on the reserve because not all oil cargos have off-takers. “The
rise in price in the spot market for oil does not affect Nigeria’s oil revenue
because the country sells on contract. A rise in price in the futures market
will materialise only in the future after delivery.
“Also, not all oil cargoes have off-takers. Only
international oil companies (IOCs) have steady market access because they are
linked with oil refineries, petrochemical plants and strategic storage
facilities. Politically connected firms, which are awarded oil lifting
contracts by the Nigerian National Petroleum Corporation (NNPC) have neither
vessels nor market access,” he explained.
Ukeje, a financial and investment expert, noted that “some
of Nigeria’s oil outputs are pledged to export-import (EXIM) banks and other
state lenders in repayment of infrastructure loans,” while the portion so
pledged does not bring in foreign exchange inflow “even as the foreign
contractors from the lending countries do not bring money into Nigeria.”
The contractors, the ex-CBN banker said, spend the proceeds
in their countries of origin, which is part of the reason the bullish crude
does not translate to a robust external reserve.
Another investment expert, David Adonri, warned that every
import-dependent country, which Nigeria is, needed adequate foreign reserves to
meet the rising level of imports, as a key component for economic stability.
Adonri, who has called for full liberalisation of the FX
market, said the reserves depletion amid rising oil prices was one of the costs
of a managed float FX. “The value of the naira and foreign investors’
confidence in the economy is tied to the level of foreign reserves available.
As it depletes, foreign investors’ confidence in the economy is being eroded.
“The main source of forex inflow is earnings from crude oil
export held by CBN in foreign reserves supported by diaspora remittances and
export proceeds. As the major provider of forex in the economy, CBN can
determine the value of the naira and influence imports. With depletion of the
foreign reserves, that power is diminished considerably,” Adonri, who is also
the Vice-Chairman of Highcap Securities Limited, said.
The declining reserves at a time the oil prices are rising,
he said, leaves room for suspicion on the tidiness of the national economic
management. With protracted COVID-19 and other economic risks tailspinning into
reduced diaspora remittances and foreign capital inflow, economists have
continued to balk at the country’s ability to stabilise the reserves.
Ashogbon said the country would need to aggressively address
insecurity and increase local production to control reliance on imports and
increase export to save the situation. The lowest-hanging fruit, he suggested,
was helping the rural dwellers displaced by bandits and terrorists to return to
their farms.
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