Despite oil rally, Nigeria’s foreign reserves dipped by $145.51 million week-on-week to close at $39.52 billion as at March 24, latest data obtained from the Central Bank of Nigeria on Sunday have shown.
Traditionally, the country’s foreign reserves are tightly knitted to performance of oil prices in the global market.
However, the current rally in oil prices of up to $118 per barrel as at Friday March 15, 2022, has refused to manifest on the reserves due to reported oil production deficit and impact of subsidy.
A recent report by Fitch Ratings warned that for Nigeria, higher oil prices would also boost the subsidy cost, denting the benefit of higher global oil prices to the country.
World Bank experts have also said that Nigeria is at a point now where rising oil prices might not be a good thing because although oil production might go up and crude oil revenue may increase, which in some sense is a good thing, the fiscal cost of PMS subsidy and gasoline subsidy will also go up.
Following the downward movement in the reserves, dollar is continuously becoming scarce amidst unabating demands, while the local currency, naira, is responding by losing value against the greenback.
During the week under review, at the import-export window (IEW), total turnover of the greenback declined by 85.8 per cent $70.97 million, with trades consummated within the N419.98 – 453.25/USD band.
In the Forwards market, the naira rate was flat at the 1-month (N418.19/USD), 3-month (N423.98/USD) and 6-month (N432.94/USD) contracts; however, the rate appreciated at the 1-year (+0.1 per cent to N448.75/USD) contract.
According to experts, the CBN has enough supply to support the FX market over the short term, given inflows from the recently issued Eurobond of $1.20 billion and the International Monetary Fund’s (IMF’s) Special Drawing Rights (SDRs)
“However, foreign inflows are paramount for sustained FX liquidity over the medium term, in line with our expectation that accretion to the reserves will be weak given that crude oil production levels remain quite low.
“Thus, FPIs which have historically supported supply levels in the IEW (53.8 per cent of FX inflows to the IEW in 2019FY) will be needed to sustain FX liquidity levels.
“Hence, we think (1) further adjustments in the NGN/USD peg closer to its fair value and (2) flexibility in the exchange rate would be significant in attracting foreign inflows back to the market,” Cordros analysts said in a note available to Business Metrics.
