Nigeria’s foreign reserves depreciated by $3.84 billion in nine months of 2023 amid foreign exchange intervention by the Central Bank of Nigeria (CBN) and slow growth in global oil prices.
InsideBusinessNG findings show the country’s foreign exchange buffer stood on September 28, 2023, at $33.242 billion from $ 37.083 billion it closed in 2022.
The CBN in its data revealed that foreign reserves closed August 31, 2023 at $33.95 billion, a decline of $3.13 billion or 8.44 per cent from $37.08 billion it opened in 2023, making it decline outcome in two-consecutive months.
InsideBusinessNG gathered that foreign reserves dropped to $36billion in February 2023 and went down further to $35 billion in March 2023. In early June 2023, it depreciated to $34 billion and reached the $33.99 billion mark on July 18, 2023.
With the decline in foreign reserves, data from the Organization of Petroleum Marketing Companies (OPEC), the daily basket price of crude oil stood at $97.48 a barrel as of September 28, from $81.29 per barrel it closed in 2022.
Nigeria’s foreign reserves recently faced divergent opinions on the actual state, given that the CBN only published gross foreign exchange reserves without comprehensive information on foreign exchange liabilities.
Analysts at Cordros Research described the International Monetary Fund (IMF) reserve liabilities as all foreign exchange liabilities to residents and non-residents, including commitments to sell foreign exchange arising from derivatives (such as futures, forwards, swaps, and options) and all credit outstanding from the Fund.
Also, the following are excluded from reserve assets: any assets that are pledged, collateralized, or otherwise encumbered, claims on residents, claims in foreign exchange arising from derivatives in foreign currencies vis-a-vis domestic currency (such as futures, forwards, swaps, and options), precious metals other than gold, assets in nonconvertible currencies, and illiquid assets.
“Based on the methods above and using data from the CBN’s 2022 financial statement, table 1 represents our findings and estimates of (1) Nigeria’s international foreign exchange liquidity position and (2) net foreign reserves as of the end of 2022. In line with the CBN’s guidance, N461.50 against the dollar is the exchange rate we used in converting the naira balances to US dollars.
“Based on the analysis above, the CBN’s foreign currency liquidity position is exceptionally lower than gross FX reserves as of the end of 2022. Using gross FX reserves ($ 33.88 billion) as of 10 August and holding the FCD constant, we estimate that the CBN’s liquid reserves are currently at $11.87 billion (or 35.0 per cent of gross foreign exchange reserves as of 10 August),” the report by Cordros Research explained.
According to analysts at Cordros Research, the low international liquidity position clarifies why the CBN’s FX supply to the official windows has been underwhelming in the past three years even when gross FX reserves settled as high as $41.57 billion in September 2021.”
“The significant implication of the low CBN’s international FX liquidity position is that the apex bank’s FX intervention to support the domestic currency will remain underwhelming until there is a significant FX inflow to the CBN and the economy. The preceding will also likely erode foreign investors’ confidence in the economy. Aside from the aforementioned, given that (1) foreign investors have chosen to remain on the sidelines amid the current prohibitively low domestic interest rates and (2) export earnings remain low, we expect the naira to remain on the backfoot and depreciate further against the US dollar in the near term.
The expected lingering exchange rate pressure also implies that domestic inflationary pressures will be sustained over the rest of the year, more so that PMS prices are expected to remain high.
“Given the CBN’s low international foreign currency liquidity position, foreign investors may demand higher yields on Nigeria’s sovereign instruments, making the country’s external borrowing costs remain prohibitively high.”