Nigeria lost about $2.1 billion in foreign reserves within the first half of 2021, falling to its lowest level in almost four years.
This is according to data obtained from the daily external reserve movement tracker, released by the Central Bank of Nigeria (CBN).
Nigeria’s foreign reserve level declined from $35.37 billion recorded as of 31st December 2021, to $33.32 billion as of 30th June 2021. This represents a 5.8% decline in just six months.
The continuous decline, which has persisted for over two months has been attributed to a number of factors and prominent amongst them is the decline in Nigeria’s crude oil earnings despite bullish trends in the global crude oil market.
Crude oil has enjoyed a bullish first half of the year, having gained over 45% year to date to trade around $75 per barrel, with analysts projecting a $100 per barrel by the end of the year.
Depleting reserve despite crude oil rally
Nigeria’s foreign reserve dipped 5.3% year to date, to stand at its lowest level since October 2017 despite crude oil (which is a major source of foreign exchange) gaining over 46% in the same period.
- The slump is largely attributed to the decline in crude oil earnings, majorly caused by the cut in production quota by the OPEC+ in order to stabilize the market as most economies move to recover from the downturn caused by the covid-19 pandemic.
- According to a presentation by the Minister of Finance, Dr Zanab Shamsuna Ahmed, Nigeria has maintained crude production of about 1.4mbpd year-to-date and an additional 300,000 bpd of condensates due to the OPEC+ production quota. This is despite having a capacity to produce 2.5 million barrels per day.
- A cursory look at the latest report from the Nigerian National Petroleum Commission (NNPC) also supports the Minister’s claim that Nigerian maintained a 1.4 million bpd OPEC production cut in April 2021.
- The report also reveals that crude oil export revenue received by Nigeria in May 2021 amounted to $167.72 million (N64.2 billion).
Meanwhile, it is worth noting that the current crude oil sales are futures contracts, hence, the money is not really coming in, while the covid crisis in India, which is the biggest importer of Nigeria’s oil, also affected their ability to purchase crude.
Persisting negative trade balance
The over-dependence on foreign products has pushed Nigeria to its biggest trade deficit on record. According to the NBS, Nigeria’s foreign trade deficit widened to N3.94 trillion in the first quarter of 2021.
- The trade balance was largely affected by a significant surge in import duty and less by far export value.
- Interestingly, these import problem still relates to the country’s infrastructural problems and ease of doing business.
- Manufacturers now prefer to travel to countries like China to produce items that would otherwise be made in Nigeria, due to the high cost of production in the country.
- A negative trade balance puts pressure on the country’s foreign exchange.
CBN’s forex interventions
Due to the volatility of the Naira against the US dollar, the apex bank, manages the currency by means of forex intervention into the Investors and Exporters window and the BDCs.
- Nigerian Central Bank adopts a managed floating mechanism for the naira, hence requires intervening in the forex markets by selling dollars to the market at a reasonable rate so as to maintain the local currency.
- However, Nigeria is in shortage of foreign currencies, owing to the nation’s trade and crude oil problem and a significant decline in diaspora remittances, leaving Nigeria’s external reserves vulnerable.
- Earlier in June 2021, the Central Bank announced an increase in the amount of foreign exchange allocated to banks to meet the requests of customers.
- These events have also forced the CBN to adopt the I&E market rate so as to reflect a rate somewhat close to the market realities. However, the fear of further devaluation of the naira still looms.
What they are saying
According to Opeoluwa. Dapo-Thomas, a commodity market expert and investment analyst, Nigeria’s external reserve decline is majorly due to the reduction in Nigeria’s crude oil earnings
“We are highly dependent on crude oil sales, that we tend to react the same way the global oil market reacts,” he said. Notably, he pointed out the effect of FX shortage in the country on Nigeria’s reserve, by extension on Nigeria’s exchange rate.
Dapo-Thomas highlighted that the problem associated with African oil-producing nations is that they tend to be overly dependent on oil earnings and hardly diversify.
In contrast to other African oil-producing countries, Algeria currently boasts of an external reserve of over $55 billion, Egypt ($40.47 billion), while Angola’s reserve stood at $7.9 billion.