Nigeria’s external reserves may be going toward a bottom in mid-July if the trend that began four weeks ago is not maintained.
The data have been on a downward trend since August 11, when what appeared to be a rebound turned out to be a reprieve from the previous year’s dismal trend. When it began a retraction on August 11, the figure could only recoup 1.5 per cent of its losses. The tiny rally, which lasted a month, raised hopes for the country’s external reserves.
Last week, gross reserves closed at $33.52 billion, while liquid (or accessible) reserves were $33.24 billion, for a total of $33.38 billion. A longer timeframe beyond the recent two weeks’ performance is required to determine whether the last two weeks’ performance is indicative of a pattern or can be dismissed as noise.
If this trend continues, statistics could fall to where they were in early July, if not lower, raising concerns about the country’s ability to withstand increased imports.
The reserves had increased from a one-year low when the gross component was anticipated to be $33.09 billion and the liquid component was estimated to be $32.85 billion. Following that, a modest but constant accretion began, peaking at $33.45 billion on August 10 in a brief rally.
The growing uncertainty in the international oil market provides a troubling signal concerning the country’s near-term foreign exchange earnings and the state of its external reserve.
In recent years, the country’s external balance condition has deteriorated. The import-to-trade ratio was more than 70% in the first quarter of the year.
Import bills have risen since 2019, while exports have either remained flat or declined. Economists have called for diversification of external factors to mitigate the concentration risk associated with petroleum export.
Brent has lost around 15% of its value from its previous top, sliding from $75 to $65 per barrel between June and August. Oil prices could fall further unless global economic risks and concerns about a resurrected COVID-19 subside.
As a result, experts believe that the country’s strong economic outlook and stable foreign reserves have been harmed by the country’s declining oil prices.
According to the new figures, the country’s reserve per capita is $167, which is quite low when compared to its peers in Africa and other emerging countries. South Africa’s external reserve per capita exceeds $900, while Egypt’s is under $400. Furthermore, Nigeria’s neighbouring Ghana has a reserve per capita of $246.
According to The Guardian, Nigeria has the weakest external reserves of any oil-producing country. With a population of 35.3 million, Saudi Arabia has more than $12,000 in foreign exchange (FX) reserves per capita, whereas Nigeria has almost $170 billion. Other oil-producing countries, including Kuwait, Libya, the United Arab Emirates (UAE), Iraq, Iran, and Qatar, have more real and nominal reserves than Nigeria.
Economists evaluate the reserves’ strength based on their ability to cover imports. In many circumstances, a minimum of six months’ coverage is advised.
Dr Biodun Adedipe, Chief Consultant of B.Adedipe Associates, stated recently in a mid-year economic assessment that the country’s reserves could still cover its forecast six-month imports, implying that no near-term concern was anticipated.
However, the truth of this reasoning will be put to the test in the coming quarters as the volume of imports continues to climb on the back of stagnant or declining reserves.