Again, Nigeria’s foreign reserves decline by $3bn in one year
Nigeria’s foreign exchange reserves have remained under severe pressure, declining by $3billion to $37billion in January, 2023 from its $40billion in January, 2022, which represents a 7.6 per cent decline year-on-year.
According to the country’s apex bank, the Central Bank of Nigeria CBN, Nigeria’s external reserves declined by 7.6per cent year-on-year to $37.0billion in January 2023 compared to its $40.0billion print in January 2022. On a monthly basis, Nigeria’s external reserves fell by $86.6million from $37.1billion at the close of Dec-2022.
The decline in dollar flows can be mainly attributed to weak crude oil sales (Nigeria’s primary source of dollar inflow) owing to low production levels compared to the OPEC quota. In addition, Foreign Portfolio Investments (FPIs) flows have been poor, as evidenced by the 20.9per cent quarter-on-quarter decline to $757.3million in the first half of 2022 while abysmal foreign investor participation in the equities market is further evidence.
In a bid to boost the country’s foreign exchange earnings over the next couple of years, the CBN initiated the “Race to $200.0billion programme” in March 2022. The R200 Policy seeks to generate $200.0bn dollars in foreign exchange earnings from non-oil proceeds over the next five years, thereby insulating the economy from foreign exchange shocks and shortages.
As of September, 2022, the CBN had only repatriated $1.3billion from the programme, of which $870.0mn was sold at the I&E window. Thus, it can be said that this programme has not granted significant returns as non-oil exports declined by 35.1per cent quarter –on-quarter in the third quarter of 2022. Overall, the average turnover in the I&E declined 38.6per cent month-on-month to $99.5million in January, 2023 from $162.0million at the end of 2022, primarily due to the low dollar supply in the economy.
We note that the decrepit foreign exchange war chest was one of the considerations for Moody’s Investor Service in its downgrade of Nigeria’s foreign and local currency ratings. This implies that the Federal Government cannot source funding in the international debt market amid the elevated global interest rate environment.
For the FPIs, we expect investors to continue to favour developed markets with higher interest rates and less risky assets. In addition, we believe that the uncertainties surrounding the upcoming general elections will deter investors as they wait things out. However, the recent increases in crude oil output can serve as a potential tailwind to improve export receipts amid moderately high energy prices.
Source: United Capital
