Wednesday, January 19

Nigeria’s external reserve is experiencing its worst run since 2020

The Central Bank of Nigeria reported Nigeria’s external reserve printed at $40.5 billion as of December 23rd, 2021, two days to Christmas. However, a closer look at the data suggests we are in one of the worse runs since 2019.

By all indications, the external reserve is likely to close at the borderline of $40 billion, a stark improvement from the $34.9 billion we closed at in 2020. A major reason for the growth recorded in the external reserves can be attributed to rising in oil prices, increased oil sales, higher external loans are a marginal increase in foreign inflows.

Despite this modest achievement, the exchange rate between the Naira and dollar faired worse in 2021 especially in the black market, and is likely to close around N570/$1 by our estimates. This is even more worrisome when you consider that at some point in November and early December, it seemed like the exchange rate could strengthen to between N540-555/$1.

A further look at Nigeria’s external reserve data suggests the reason for the inability of the exchange rate to hold favourably for the naira is attributed to the sliding external reserves. Coming into November 2021, Nigeria’s external reserve hit a two-year high of $41.8 billion (29th October) as inflows from oil sales and external loans boosted the country’s forex balances.

However, the slide commenced as we entered December 2021, when external reserves started a decline every day from November 2nd, 2021 till date. In fact,  the external reserves grew for 50 consecutive days it was reported between August 24th and October 27th, 2021 adding $8.4 billion to the balance.

Contrast this to 40 consecutive days of decline between October 29th and December 23rd, 2021 where we have lost $1.24 billion in net outflows. See data used.

Major Declines

  • We experienced two major declines, 29th November when $604.6 million and another $157 million outflow on the 12th of October 20221.
  • In contrast, we experienced a major surge on 30th September, 8th October, and 15th October with $785.8 million, $620.5 million, $566.4 million respectively.

What this means

  • Nigeria will likely close the external reserve at around $40 billion. However, this means we are yet to recover from the levels we were in between August and September 2019 when we were around $44 billion.
  • It is also apparent, a lot of the forex inflows which will typically accrue through official channels pass through unofficial sources like the black market.
  • The deliberate CBN policy of not implementing a full managed float of the exchange rate is also viewed negatively by forex traders preferring to dump it for unofficial sources.
  • We do not expect to see any improvement in Nigeria’s forex situation if the current policies persist. However, we will experience occasional swings as the external reserve gyrates to cycles of inflows and outflows.

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