EHIME ALEX writes that despite rising oil prices and the CBN’s management of the foreign exchange regime, Nigeria’s external reserves dipped further in the second quarter
In the second quarter of 2021, Nigeria’s external reserves dropped by $1.496bn according to statistics obtained from the Central Bank of Nigeria website. The external reserves, which stood at $34.82bn as of April 1, fell to $33.32bn as of June 30. In the first half of the year, the country’s external reserves dipped by $2.05bn.
On the other hand, the price of crude oil has continued to rise. Due to strong improvement in oil prices in the international market, the price of Bonny Light rose by over 25 per cent in Q2, and has risen above 52 per cent since the beginning of the year.
As of June 25, data from the CBN showed that oil price stood at $77.34 per barrel compared to $61.7 as of April 1 and $50.67 as of January 1. This is far above the $40 per barrel budget benchmark set by the Nigerian government. Around April 2020, the price of crude was as low as $14 per barrel.
With the reduction quota of 1.4 million barrels per day set by the Organisation of Petroleum Exporting Countries and the huge cost on importing refined petroleum products in the absence of local refining capacity, not much improvement may be expected from the external reserves, except the current uptick in oil prices remains bullish.
CBN’s defence
Amid measures to boost the country’s forex supply, accretion to reserves and ease of the current exchange rate pressure, ironically, the CBN seems to be tightening the noose.
The bank had adopted the Nigerian Autonomous Foreign Exchange Fixing rate as the government’s official exchange rate for the naira, effectively devaluing the currency by 7.6 per cent. It had also introduced a naira-for-dollar scheme to boost remittance inflows.
However, the gross decline in the external reserves reflects sales to the foreign exchange market and third-party payments, the Monetary Policy Committee of the CBN noted at its last meeting. The committee also blamed exchange rates and other pressures resulting from capital flow reversals associated with the Coronavirus Disease shock, as investors sought safe havens, but promised to ensure liquidity and stability in the foreign exchange market as well as moderate the exchange rate pass-through to inflation.
More debts beckon
Nigeria’s debt profile will hit N36.3tn, as President Muhammadu Buhari seeks fresh N2.3tn loan. The country’s public debt stock has risen to N33.11tn ($87.24bn), representing an increase of 0.58 per cent in Q1 2021 compared to N32.92tn in Q4 2020, according to the Debt Management Office.
It seems that any argument that the country is heavily indebted, or that it needs to spend all the earnings to overcome the infrastructure deficits or pay salaries, will not be helpful to the economy now and in the future.
Knock for CBN’s FX management system
The apex bank seems not to be getting its policy measures right, as the World Bank has faulted its various methods. According to the Bretton Woods institution, the CBN needs to create the environment for a more predictable forex management system.
At its recent bi-annual Nigerian Development Update, the bank faulted CBN’s management of the forex regime, pointing to it as a fundamental cause of the nation’s forex crisis. The way the country’s exchange rate is being managed limits access to forex and thus adversely affects investor confidence and investment appetite.
“Significant spreads between the official, the Investors and Exporters Foreign Exchange, and the parallel exchange rate persisted throughout 2020 and as of April 2021, the spread between the official and IEFX rate was estimated at eight per cent, and between the IEFX and the parallel rate reached 18 per cent (the spread between the official and the parallel rate was 27 per cent),” the World Bank observed.
Nigeria’s forex policy has been riddled with uncertainties in recent times, owing largely to policy somersaults on the part of different officials of government.
The World Bank also noted that the “two-month naira-for-dollars scheme introduced by the CBN in March 2021 to serve as an incentive for increased remittance inflows through formal channels was extended indefinitely in May and was preceded by regulatory directives in December 2020 – that mandated all licensed operators to pay remittances in dollars.”
While the Naira4Dollar scheme may encourage the use of the formal channels, the World Bank said, “it is not clear that incentive payments will increase remittances to the country.”
It, however, urged the CBN to allow the I&E FX market function properly by allowing a more market-friendly approach for exchange rate transactions.
“While the CBN has taken steps towards operationalising unification of exchange rates, greater flexibility will be necessary to support the recovery. Until oil companies are allowed to sell FX receipts to IEFX bank participants, CBN would still have an important role to play as a FX supplier.
“In this scenario, participating banks in the FX market will start to play an expanded role that goes beyond just executing buy/sell orders of its clients to start acting as market makers, meaning that they start to quote two-way prices of buying and selling on its behalf and carrying a stock of FX. With increased flexibility, the CBN could start intervening only to smooth large fluctuations and work towards ensuring a single, market-driven rate,” the World Bank added in that conversation.
OPEC+ recent decision puts further strain
A deadlock at OPEC’s meeting with its allies on oil output policy, with no agreement reached, owing to reluctance by some key members to extend production cuts into 2022, may put further strain on Nigeria’s external reserves.
It should be noted, however, that its strict production controls, coupled with rising oil demand amid improving global macro-economic narrative has moved oil prices to pre-COVID-19 levels and even beyond. Initially, the cartel had settled for a 9.7mbpd production cut to match supply with demand. This has been gradually eased to 5.8mbpd by July.
Analysts are of the view that the rising oil prices should bode well for the Nigerian budget, given that its benchmark price for crude oil for the 2021 fiscal year was $40.
In a recent report, analysts at CSL Stockbrokers Limited, however, expressed worries that despite the rising oil prices, the impact has yet to be seen in the level of the country’s reserves, stressing that this reflects the increased CBN’s forex interventions and low impetus for foreign inflows.
“Despite the improved optimism, downside risks still exist, and we continue to reiterate our age-long clamour for economic managers to adequately diversify the country’s export earnings, particularly exploring opportunities in mining and agriculture,” the analysts added.
Meanwhile, the Group Managing Director of Nigerian National Petroleum Corporation, Mele Kyari, has said that the rise in oil prices was hurting Nigeria, which relies heavily on fuel imports for its needs. He argued that increase in oil prices implies an increase in the price of petrol, which currently implies an increase in subsidy reported as under-recovery losses in the books of the NNPC. In March, fuel subsidies were reported to have cost the country up to N120bn monthly.
