Nigeria’s external reserves fell by 3.6% in August 2022, to $39.024 billion, down from $40.520 billion on December 31, 2021.
Pressure on the Nigerian foreign exchange reserves has forced it to shed a whopping $1.496 billion Year to date, despite the surge in crude oil prices.
Despite the apex bank’s interventions in the forex market, the Nigerian economy is starved of foreign exchange as currency traders continue to complain about restricted forex liquidity, causing the local currency to depreciate more in the FX market.
Although there are a number of CBN policies and programs aimed at encouraging inflows, Nigeria’s inability to attract foreign currencies through export value, diaspora remittances and investments have resulted in severe FX shortage in the country, encouraging arbitrage in the parallel market.
What you should know
The decline in foreign reserves comes amidst over $100 crude oil average price in August against a benchmark of $62 per barrel set by the Federal Government for the N17.12trillion 2022 budget.
Nigeria’s foreign exchange reserves are mostly reliant on the income from the export of crude oil, however, despite the rise in oil prices, Nigeria’s capacity to increase its oil revenues has been constrained by decreasing oil production.
The Nigerian exchange rate between the naira and the US dollar has massively declined from N565/$1 to N700/$1, representing an N135 differential year to date. On the other hand, the official exchange rate has maintained stability to trade around N430/$ at the time of writing this article.
However, the stability of the official exchange rate comes at a cost to the reserves as the Central bank sells foreign exchange in the official window from its external reserves. The reserve decline can be linked to CBN’s ongoing intervention in the official FX market to limit exchange rate volatility.
Despite the apex bank intervention in the official market, Nairametrics reported earlier that thousands of applicants are facing harrowing experiences as they get their PTA in two or three tranches depending on what is available in the bank’s vault.
The Central Bank of Nigeria has also released $265 million to save the Aviation sector, with a portion of it going to pay blocked funds owing to foreign airlines. However, if the foreign exchange pressures persist the apex bank would have to sell more of the foreign exchange from its external reserves.
The apex bank also stated that foreign exchange inflows through the RT200 FX Programme surged significantly in Q1 and Q2 of 2022, reaching around US$600 million as of June 2022. Nonetheless, the rise in foreign exchange inflows via the RT200 FX does not appear to be adequate to alleviate the forex crises.
Hence the bank’s ability to stabilize the Naira will be hampered if the pressure continues since Nigeria’s foreign reserves are being depleted.
