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Analysis: Drop in global oil prices puts Nigeria’s foreign reserves in a dangerous place

GLOBAL crude oil prices fell swiftly on Monday after heightened fears of coronavirus becoming a pandemic due to the increased number of cases in Asia, this reality poses threats to Nigeria’s oil-dependent economy.

Nigeria, Africa’s largest oil-producing nation and a key member of the Organisation of  Petroleum Exporting Countries, OPEC, is up against making tough choices as the dwindling prices of crude oil since the outbreak of the coronavirus puts its foreign reserves in a precarious position.

The Central Bank Of Nigeria, CBN, on Monday announced that the country’s foreign exchange reserves which have been on a free-fall since last year, dropped from $38.34 billion on January 15, to $36.69 billion on February 20, according to its latest figures.

According to records obtained from the CBN, the reserves have been on a steady depletion from $39.8 billion on November 2019 to $39.24 billion on December 13, 2019, also losing $1.26 billion in October 2019 after the foreign reserves fell from $41.76 billion on October 2 to $40.5 billion as of the end of October.

The reserves also dropped by $482.18 million from $45.14 billion as of July 8 to $44.65bn on August 8, 2019.

Nigeria depends on crude oil for over 60 per cent of fiscal revenue, while 90 per cent of its foreign exchange inflows also comes from the proceeds from the oil market according to a Reuters report.

The CBN uses the foreign reserves to keep the naira at a stable rate which is currently valued at ₦360 to a dollar using a multiple exchange rate administration to keep the pressure on the currency. By selling the dollar on the interbank market, it is expected to boost liquidity after floating the naira for investors.

CBN’s policy on currency intervention has seen the apex bank introduce billions of dollars into the foreign exchange market to maintain the naira at a stable rate, in an attempt to curb imports and boost local production.

However, the steadily falling crude oil prices globally mean that Nigeria will need to spend more of foreign reserves to cushion the naira from being devalued but if oil prices fail to improve, this could lead to a possible devaluation of the naira.

Brent crude, Nigeria’s oil benchmark equivalent fell on Monday by 3.4 per cent to $56.53 a barrel, which is $1.53 above Nigeria’s 2020 budget benchmark which was pegged at $55.

This implies that lower prices in the global oil market for a longer period would affect Nigeria’s oil revenue leading to further depletion of the foreign reserves, making the economy vulnerable as traders who make use of forex for their purchases and imports will have a short supply leading to a possible inflate the prices of goods and services.

In 2018, Foreign Direct Investment into Nigeria was $2 billion generated mostly from the energy and telecom sector, compared to $5.6 billion in 2013 the decline was attributed to an unfavourable economic and tax system, according to data obtained from The Economist Intelligence Unit (EIU).

Godwin Emefiele, Governor of the CBN is optimistic that despite lower oil prices the country has achieved much since easing out of the recession in 2016.

“In the import and export window, over $60bn worth of transactions have taken place since the inception of the window in April 2017, and our foreign exchange reserves are above $40bn as at October 2019, relative to its low point of $23bn in October 2016.

“We have been able to build our reserves in the midst of lower oil prices, as strong reserves aid the confidence of domestic and external investors. Today, our current stock of external reserves is able to finance 12 months of current import commitments,” he said.

Cobus de Hart, chief economist for North and West African countries at NKC African Economics in a report said that using the falling foreign reserves to defend the value of the naira would offer only a temporary reprieve.
“Exchange rate stability also clearly remains one of the key policy objectives, and intensifying pressure on reserves thus raises the risk of additional capital controls being pursued. This could serve to weigh further on the still-fragile economy,” he said.

 

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