Nigeria’s foreign reserves depleted by $5 billion in less than four months, official data from the Central Bank of Nigeria (CBN) shows. From $45 billion in July, the figure dropped to $40.79 billion as of October 22, 2019.
At $40 billion, this is the lowest reserves figure in 2019 and the biggest decline in close to 2 years. Between the beginning of this month and October 22nd, the external reserves plunged by over $969 million.
Foreign exchange reserves are cash and other assets held in reserve by the monetary authority of a country. Usually, in foreign currencies, they are used to balance external payments, influence the foreign exchange rate of its currency, and maintain confidence in financial markets thereby absorbing shock and preventing economic crises.
Stating reasons for the billion-dollar loss in reserves, the central bank at the close of its Monetary Policy Committee meeting last month cited weakening global oil prices and recurrent intervention in the foreign exchange market.
But it is more of one than the other. Although the decline coincided with volatility in oil prices, it is driven more by increased dollar sales in the currency market by the apex bank.
The CBN continues to defend the naira using foreign reserves – a total of $8.29 billion was expended in the first half of this year in order to sustain exchange rate stability. This has been the norm since the Investors and Exporters’ window was introduced in Nigeria, turning the bank into an active buyer and seller of currencies.
International organizations and economic experts have continued to call on the CBN to float the local currency, adopting a market-driven approach to the exchange rate. But as foreign capital flows out of the country, the bank had to actively intervene to keep the Nigerian naira in line, financial expert Walle Smith was quoted as saying by Nairametrics.
Currency flow deficit
Along with plunging oil prices and forex interventions, other factors are the slowdown in dollar inflows due to poor external sector performance by the Nigerian economy and debt service payments, according to the CBN’s monthly economic report for August 2019.
While the flow of foreign exchange into the country has reduced over time, owing to plummeting oil prices and slowing non-oil export, the outflow of the dollar has gone in the opposite direction as Nigeria is an import-dependent economy.
Foreign exchange inflow through the CBN stood at $4.8 billion for August as against an outflow of $6.14 billion. This puts the net outflow at $1.24 billion, meaning that the use of reserves to either defend the naira or service the debt comes at a huge cost.
Devaluing the Naira
Based on the current trajectory of things, there are already concerns that the local currency may be devalued – an official lowering of Nigerian naira against foreign currencies within the fixed exchange rate system. A devaluation in the naira means N1 would be worthless against other currencies such as the Dollar, Pound, and Euro, compared to the current rate.
Although a devalued or weakened naira would save Nigeria a huge chunk of reserves that would have been spent defending the currency at a higher rate, it would simultaneously make imports into Nigeria more expensive.
The latter effect would affect the economy more as it highly depends on imports. A fall in the value of the naira means imports, such as refined petrol, food and consumer goods will become more expensive. End consumers and businesses would have to pay more for almost every item bought.
But the CBN is looking to prevent that with the aid of recent policy moves, Nairametrics says. One of such measures introduced by the apex bank to keep defending the naira is the recent foreign exchange ban placed on food items and some fiscal measures to boost revenue.
The CBN Governor, Godwin Emefiele recently said that if external reserves drop to between $30 billion and $25 billion, and oil price falls between $50 – $45, the bank could consider moving on to float the exchange rate and devalue the naira. That seems inevitable if the economy maintains the current trend.
The post Nigeria’s Naira may be weakened as external reserves plummet appeared first on Ventures Africa.
from Ventures Africa https://ift.tt/2JixpDA
via IFTTT
