Nigeria’s Foreign Reserves Decline by $3.8 Billion Over 10 Months

Nigeria’s foreign exchange reserves, which have long been a safeguard against economic turmoil, have diminished by $3.8 billion, marking a decrease of approximately 10.2% in recent months, bringing the total reserves to $33.31 billion. This data, spanning from January to October 2023, was obtained from the Central Bank of Nigeria (CBN) website, specifically on October 25, 2023.

An analysis by the Nigerian Tribune reveals that this is the lowest level of reserves since July 2021 when it had hit a low of $33.09 billion.

The decline in Nigeria’s foreign reserves is attributed to various factors, primarily the inability to capitalize on the surge in global oil prices since February 2022 due to geopolitical unrest in Eastern Europe and a scarcity of US dollars within the CBN’s vault to support the Naira. This has forced the central bank to rely on its reserves to defend the local currency in the foreign exchange market.

Experts from Cowry Assets Management Limited assert that the continuous decrease in gross official reserves, combined with foreign exchange liquidity constraints, has weakened investor confidence and discouraged offshore investments. Factors such as rising import costs driven by the war in Ukraine and supply chain disruptions are also contributing to this decline.

As of mid-October 2023, the total reserves can cover about eight months of merchandise imports when considering the balance of payments for the 12 months up to December 2022, and nearly seven months when services are included.

Data from FMDQ indicates that monthly transactions on the Investors’ and Exporters’ (I&E) FX window in the first nine months of 2023 have averaged $2.1 billion, a decrease from the $2.4 billion over the same period in 2022.

In August 2023, JP Morgan, a significant player in managing Nigeria’s external reserves, released a report estimating Nigeria’s net reserve position to be approximately $3.7 billion. This calculation factored in various off-balance sheet swaps amounting to $21 billion, on-balance sheet FX forwards of $7 billion, and securities lending obligations of $5.5 billion, which could have affected the actual net reserve position.

Notably, the report also mentioned an estimated non-public figure for outstanding Open Market Operations (OMO) obligations issued by the CBN to Nigerian banks and financial institutions, totaling N9.8 trillion, approximately $21.2 billion when converted. These OMO obligations played a substantial role in adjusting the gross reserve figures.

In light of these developments, Cowry Assets Management emphasizes that while Nigeria’s foreign exchange reserves have seen a decline, they are still relatively robust, covering approximately 4.4 months of current external payments. This underscores the importance of prudent management to ensure the nation’s economic stability, meet its import requirements, and effectively defend the Naira.