By Chinwendu Obienyi
Nigeria’s struggles with weak crude oil output and a drop in foreign investors’ participation in the capital market has triggered a decline in its external reserves, which fell by about $2.8 billion in the first six months (H1) of 2023, data obtained from the Central Bank of Nigeria (CBN) revealed.
The external reserves had opened the year at about $37 billion but have now dropped to about $34.1 billion as of June 2023. Since the Tinubu-led administration came into power, the external reserve has gone from $35 billion as of May 30th to $34.1 billion amid the unification of the Naira and the introduction of a managed exchange rate float.
A cursory review of the data shows this is the largest half-year drop since 2015 when the external reserves went from $34.4 billion at the end of the year to $28.1 billion by the end of the first 6 months of June 2015.
The country’s external reserves have been on a downward trajectory since this year due to a lack of foreign investor inflows, lower crude oil outputs, and a fragmented forex market. The external reserve is typically funded from a combination of the sale of crude oil proceeds, external debts, and foreign investor inflows.
The CBN had blamed the decline in reserves due to lack of external debt financing and with Nigeria unlikely to tap the foreign debt market this year due to higher global interest rates, especially for emerging market Eurobonds, concerns have since risen.
In its last MPC meeting, the apex bank showed concerns about the lower external rate and stated that a build-up is necessary.
“The MPC observed that the economy continued to be weighed down by high import bills, leading to pressure on foreign exchange and resultant increase in the general price level. The Committee noted that the economy needs to build up the stock of foreign reserves to act as buffers against shocks.
In addition, the current trend in price development would continue to be monitored by the bank with greater collaboration with the fiscal authority, to address the drivers of inflation”, it said.
The CBN also blamed the drop on transactions in the forex market. It said, “the Committee, also, noted the moderate decline in the level of gross external reserves to US$34.91 billion in April 2023, from US$35.14 billion at end-March 2023, attributable to transactions in the foreign exchange market and largely to miniscule accretion to reserves from crude oil exports.”
The latest changes in the forex market are also yet to lead to an inflow of foreign investor capital as investors continue to show concern over the rising inflation rate and the need for interest rates to rise.
Speaking to Daily Sun via telephone at the weekend, Vice Chairman at Highcap Securities, David Adonri, stated that this was no surprise at all owing to the huge cost of governance in the past six months.
“We had a 400 billion budget allocation to the 2023 elections and another figure, I think almost N2 billion was earmarked for the Census exercise which was supposed to take place in April, was later suspended. We have not even talked about the expenses associated with the printing of the new Naira notes which i am still yet to see in banks, ATMs or PoS teller machines. All these caused a huge strain to the reserves and so it is expected that the reserves will drop”, Adonri explained.
He however called on the FG to ensure that its macro-economic policies must translate into concrete improvements of the fundamentals of the economy and of the market itself.