New Telegraph

Analysts: External reserves may drop below $36bn by year-end


If Nigeria’s external reserves continue to decline at their current pace, they could fall to slightly below $36billion by the end of December, analysts at FBNQuest Research have said.

The analysts, who made the prediction in a note released over the weekend, attributed the significant drop in the external reserves in recent months mainly to the Central Bank of Nigeria’s (CBN) increased interventions in the official foreign exchange markets.

They also pointed out that the reserves had recorded little accretion from crude oil sales this year despite the high price levels of the commodity, which accounts for over 80 per cent of the country’s foreign exchange  earnings.

The analysts stated: “Nigeria’s gross official reserves declined by USD866m to $37.4 billion in October. The level of attrition is the second highest since May of this year and follows a decrease of $772 million in September.

“The sharp drop in the fx reserves is mostly due to the CBN’s increased interventions on the various fx windows, such as the investors and exporters (I&E), and the Secondary Market Intervention Sales (SMIS) windows, following the difficulties with fx supply.

Despite the high level of crude oil prices, the external reserves have seen very little accretion from oil sales this year, due to the sector’s low productivity as a result of large-scale crude oil theft.”

The analysts further stated that apart from low crude  oil sales, other sources of fx inflows, such as inflows from Foreign Direct Investment (FDI) and FPI investors “have been very limited on account of tough financial market conditions due to monetary policy tightening by global central banks.”

They also cited the “relative over-valuation of the naira on the official NAFEX window relative to the USD and other major currencies,” as another significant factor that is responsible for the dwindling capital inflow. is the relative over-valuation of the naira on the official NAFEX window relative to the USD and other major currencies.

According to the analysts, “year-to-date, the naira has depreciated by c.5 per cent on the official window. This contrasts with a depreciation of around nine per cent for  the South African Rand and almost 35 per cent for the Egyptian Pound.

“The Egyptian Pound’s sharp depreciation is a result of two devaluations this year, with the most recent in October reflecting the currency’s floating.

Following the move, the country agreed on a $3 billion loan from the IMF, with at least $5 billion more to come from its international partners, according to Bloomberg.”

They noted: “Total reserves for Nigeria as at end- October covered 8.5 months of merchandise imports based on the balance of payments for the 12 months to June 2022, and 6.5 months.”

When services are added, the analysts projected that “if the present attrition rate continues, Nigeria’s foreign exchange reserves will probably fall to a little under USD36bn by the end of December.

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