Nigeria’s foreign exchange (FX) reserves have witnessed a significant downturn, plunging by approximately $1.84 billion in 26 days, amidst the Central Bank of Nigeria’s (CBN) robust efforts to stabilise the naira.
Current figures from the CBN, as of April 12, 2024, reveal that the FX reserves are now positioned at $32.61 billion, a stark decline from $34.45 billion recorded on March 18, 2024.
Previously, Nairametrics reported a substantial depletion in the reserves, shedding about $1.02 billion in just 18 days, attributed to the CBN’s vigorous interventions in the FX market to support the naira.
This continued trend highlights the persistent pressures facing Nigeria’s currency and underscores the central bank’s proactive measures to manage market dynamics and bolster economic stability.
Lowest reserves in over six years
Nigeria’s foreign exchange reserves plummeted to the lowest level since September 29, 2017, when the reserves were $32.49 billion.
This lowest level in six years and six months marks a decisive end to a period of steady accrual, during which the reserves witnessed a 43-day surge, accruing $1.28 billion between February 5 and March 18, 2024.
The CBN earlier attributed the rise to increased remittance payments from Nigerians abroad and heightened interest from foreign investors in local assets, including government debt securities. The apex bank also noted that the increase was due to reforms in the foreign exchange market and an increase in oil production amongst others.
Nigeria’s foreign exchange reserves have exhibited a consistent downward trajectory, shedding approximately $1.84 billion from a high of $34.45 billion logged on March 18, 2024, to a significant low of $32.61 billion by April 12, 2024. The reserves experienced a marginal drop to $34.39 billion the next day and continued to fall steadily through April. By the start of the month, the figure stood at $33.57 billion and continued to wane, reaching $33.43 billion by April 4. The depletion of reserves pressed on, with the figures at $33.04 billion on April 8 and finally nearing the $32.61 billion mark on April 12.
This diminishing pattern underscores the prevailing financial strain as the apex bank strives to maintain the naira’s stability amid challenging economic conditions.
Likely Reasons for Depleting Reserves
Increased Central Bank FX Interventions: The CBN has increased its intervention in various FX windows, aiming to stabilize the naira.
This includes selling dollars more aggressively, which reduces the overall reserve levels. Such interventions, though necessary to manage the currency’s value, lead to a rapid depletion of reserves. Within the 26-day period under review, the CBN announced the complete clearance of the valid foreign exchange backlog, the sale of $10,000 foreign exchange to each Bureau De Change operator (BDC) in Nigeria at a rate of N1,251/$1, and another sale of $10,000 to each BDC at a rate of N1,101/$1
Debt and Financial Obligations: Nigeria faces significant external debt service requirements, including payments on Eurobonds and other international financial obligations. The repayments of these debts require substantial amounts of foreign currency, further draining the reserves. While there is yet to be fresh data for Q1 2024 on Nigeria’s external debt servicing, Nigeria spent about 50% of its dollar payments to service external debts between January and October 2023, a significant portion underscoring the growing burden of foreign debt on the nation’s economy. Also, Nigeria’s expenditure on external debt servicing soared to $560 million in January 2024, marking a 339% hike compared to the previous year’s $112 million.
Low Oil Production and Revenue: Nigeria has been grappling with low oil production levels, largely due to infrastructure challenges, oil theft, and vandalism. These issues significantly reduce the country’s primary source of foreign exchange revenue. Moreover, the global economic conditions and policies that affect oil prices also influence the reserves. Although global oil prices have been high, Nigeria has not been able to capitalise on these due to its reduced production capacity. Nigeria’s production of crude oil fell for the second time this year, from 1.32 million barrels per day in February to 1.23 million barrels per day in March, according to data from the most recent monthly oil market report published by the Organization of Petroleum Exporting Countries (OPEC). The most recent data also revealed that, in March, Libya produced roughly 1.24% more barrels per day than Nigeria, barely surpassing them. The Minister of state for Petroleum Resources, Sen. Heineken Lokpobiri recently attributed the low crude oil production in the first quarter of the year to issues with the Trans-Niger pipeline and maintenance activities by some oil companies.
What You Should Know
The depletion of FX reserves is a cause for concern as it reflects the state of the country’s balance of payments and its ability to meet international obligations.
A significant decline in the reserves can affect investor confidence and may lead to a credit rating downgrade, which can further impact the nation’s borrowing costs. Already, the World Bank said Nigeria has a weak credit rating for sovereign bonds.
The decrease in reserves may also limit the CBN’s ability to intervene in the currency market, potentially leading to further depreciation of the naira.
The International Monetary Fund (IMF) recently projected that Nigeria’s foreign reserves are expected to see a significant reduction, falling to $24 billion in 2024.
The IMF anticipates a challenging period through 2024–25 for Nigeria’s financial account, exacerbated by an absence of new Eurobond issuances, significant repayments of existing funds and Eurobonds totalling $3.5 billion, and continued portfolio outflows.
However, it projected a hopeful recovery to $38 billion by 2028 as portfolio inflows are forecasted to increase.