DEMAND PRESSURE AND LIMITED FX INFLOW WEAKEN EXTERNAL RESERVES

The declining fortune of Nigeria's gross official reserve has been attributed to both a decline in the influx of foreign currency into the nation and a high demand for forex by Nigerians for travel, commerce, education, and healthcare.

According to current data from the Central Bank of Nigeria, Nigeria's external reserves have been decreasing on a monthly basis since 2022. In February 2023, they decreased by another $317 million on a month-to-month (m/m) basis, to $36.7 billion (CBN).

In a recent article, the New York Times reported that the U.S. Department of Agriculture (USDA) will announce a new program to help farmers grow more food.

The decline to wait for a change of government on May 29, which will bring an end to one of the most difficult economic eras of any regime since 1999. Questions raised about the tenure of the current CBN governor, who was reappointed by the President Muhammadu Buhari administration for a second term.

Notably, the gross official reserves have been progressively dropping since November 2021, with the exception of accretions noted in the months of April, June, and July 2022.

According to the CBN, Nigeria's external reserves decreased by $3.43 billion in only 2022.

The external reserves, which were valued at $40.52 billion as of the end of December 31, 2021, concluded December 29, 2022 at $37.09 billion, according to information provided by the CBN.

“The committee observed the decline in the external reserves position, as gross external reserves decreased by 1.34 percent at end-October 2022 to $36.87 billion, from $37.39 billion at end-September 2022,” the CBN governor Godwin Emefiele said at the organization's most recent Monetary Policy Committee (MPC) meeting in November.

Members asked the bank to continue its present strategies to increase non-oil exports in order to support the external reserves in light of signs that crude oil prices might decline on the futures market.

Robert Asogwa, a member of the MPC, stated that despite increased oil prices, the current dip in external reserves is related to the decline in oil shipments.

Interestingly, the widely reported decrease in oil thefts in the Niger Delta and the growing likelihood of increasing offshore remittances would probably substantially improve the gross foreign reserves in early 2023.

“Members advised the bank to maintain its current policies to increase non-oil exports in order to shore up the external reserves, with indications of lower crude oil prices in the futures market.”

“Reduced foreign exchange input into the economy and increasing demand pressure on the gross official reserves both underline the decreasing trend in the reserves,” according to analysts at FBNQuest.

On the basis of the balance of payments for the 12 months ending in September 2022, total reserves at the end of February 2023, however, covered 7.2 months of imports of goods and 5.6 months when we add services.

Analysts stated that in order to have a more realistic picture, the gross reserve figure (and the import cover) needed to be adjusted for the backlog of delayed foreign payments. South Africa's international liquidity position (ILP), which is more akin to Nigeria's gross external reserves and fell by $760 million to $54.1 billion in February 2023, dropped similarly to Nigeria's.

According to the researchers, this was mostly caused by the drop in the price of gold and valuation changes brought on by the strengthening of the US dollar.

To get a number for the ILP, we multiply the forward position of the South African Reserve Bank by the gross reserves (which include gold and foreign exchange deposits) and then deduct it to account for other less liquid reserve components.

Egypt's net foreign reserves, on the other hand, climbed by $128 million to reach roughly $34.4 billion. The country's $3 billion extended financial facility over a 46-month period was agreed by the International Monetary Fund (IMF) in December 2022 to help close its balance of payments deficit, the experts continued.

Yet, they believe that given the fact that the oil business appears to be bringing good news in the near future, things may soon change for the better for the nation.

The Nigerian Upstream Petroleum Regulatory Commission reports that Nigeria's crude oil output (including condensates) climbed from 1.41 million barrels per day (mbpd) in December 2022 to 1.49 million barrels per day (mbpd) in January 2023. “Gross official reserves may certainly benefit from a sustained increase in oil output around historical levels,” according to the study.

The reduction in external reserves can be ascribed to a number of variables, including a decline in oil prices and a slowdown in foreign investment inflows, according to economist Stephen Iloba of Lagos. As a result, the nation's foreign exchange profits have decreased, and the naira has come under more pressure.

Iloba responded to this pattern by stating that The CBN has taken many measures to strengthen Nigeria's external reserves, including tightening regulations on foreign exchange transactions and raising interest rates. Nevertheless, these actions have not yet yielded notable outcomes.

On the sustainability of Nigeria's present economic trajectory, some experts who talked with Daily Independent expressed concern, particularly in light of the nation's high debt levels and reliance on oil earnings. They demanded immediate steps to diversify the economy of the nation and lessen its reliance on oil.

They stated that in order to put policies in place that would support economic diversification and sustainable growth, the future government will need to collaborate with the CBN.