With the increasing price of crude oil coupled with weak macroeconomic environment, financial experts say they expect the FX liquidity conditions to remain pressured as foreign portfolio inflows remain low and accretion to the FX reserves from crude oil receipts remain weak.
According to data obtained from Central Bank of Nigeria (CBN)’s website, Nigeria’s external reserves depreciated by $1.37 billion or 3.37 per cent in the first six months of 2022 to $39.16billion as of June 30 from $40.52 billion it closed in 2021.
External reserves are assets held on reserve by CBN in foreign currencies and these reserves are used to back liabilities and influence monetary policy.
Analysis done by Daily Sun revealed that as at January 2022, the foreign exchange buffer of the CBN was hovering at an average of $40 billion.
It later fell to $39 billion in three months (February- April) consecutively before reaching $38 billion in May 2022.
The CBN data revealed that it remained flat at $38billion in June and eventually closed at $39.16billion on June 30, 2022. Further analysis revealed that external reserves in January dropped by $481.4 million or 1.19 per cent to $40.04 billion, while in February, it declined by $121.4 million or 0.30 per cent to $39.86 billion.
The external reserves in March were down by $317.8 million or 0.79 per cent to $39.55 billion and in April, the external reserves gained $41.5 million or 0.1 per cent to $39.58 billion from $39.54 billion when it commenced the month under review.
Interestingly, the external reserves were down by $943.07 million or 2.39 per cent to $38.48 billion, the highest decline in 2022, and eventually appreciated by $674.4million or 1.75 per cent to close at $39.16billion in June 2022.
The decline in external reserves is coming on the backdrop of a steady increase in global oil prices amid fears of a global economic shock from Russia’s invasion of Ukraine.
According to the CBN, daily crude oil price in six months of 2022 appreciated by 70.3 per cent or $53.62 per barrel to $129.87 from $76.25 per barrel reported on December 31, 2021.
Reacting to this development, analysts noted that the persistent inflationary pressures on high food and energy prices and CBN’s increasing intervention in the FX market is also a contributing factor.
Recently, the International Monetary Fund (IMF) had warned that Nigeria’s external reserves could fall to $29.1 billion by 2024 on the back of lower oil prices, restricted Eurobond market access, and higher capital outflows.
According to the report, the country’s foreign position is weaker as foreign buffers are limited.
Analysts at Cordros Securities in their H2 2022 Macroeconomic Outlook titled; Heightened Uncertainties Amid Great Policy Unwind, said they expect headline inflation to sustain its upward pressure given higher gas and other energy prices, elevated global food prices and the spill-over effect of higher transport costs amid pre-existing structural constraints.
“Moreover, we expect the FX liquidity conditions to remain pressured as foreign portfolio inflows remain low and accretion to the FX reserves from crude oil receipts remain weak.
Hence, we reiterate that without further devaluation of the local currency at the IEW and improved FX flexibility, the CBN can comfortably sustain itself as the significant FX supplier to the various FX markets”, they said.