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External Reserves Surge by $76.5bn in One Week

by Chinonso Ihekire
July 26, 2021
in Business
3 min read
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Nigeria’s External Reserve Drops By $26m
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In an unsuspected twist, the country’s depleting foreign exchange reserves gained an average of $76.5 million in seven days.

The gross component gained $83.3 million between July 12 and July 19 to close at $33.17 billion while the liquid part climbed from 32.85 billion to 32.92 billion.

The liquid reserve is the component available in cash/or equivalent while gross comprises liquid and blocked portion – part of the asset held in securities and other investments.

As of July 19 when the most recent data were published, $251.46 million or 0.76 per cent of the total sum was blocked – the highest proportion since March 29.

There is no sufficient data to establish whether the bullish trend of the reserve will continue in the coming week. The reserve had fallen consistently since April before the recent retracement.

While falling external reserves are seen as a falling knife for any economy, especially a highly import-dependent, the Chief Consultant of B. Adedipe Associates Limited, Biodun Adedipe, said Nigeria faces a major crisis any time its reserve falls below the estimated value of its six-month imports.

Recall that Nigeria faced a tough challenge financing its huge import as the foreign reserve holdings continue to tumble.

The falling reserves, experts warned, could leave the country’s battled economic outlook worse off as the confidence of foreign investors is partly influenced by the size of the reserve.

David Adonri, an investment expert and economist, warned that Nigeria, like every other import-dependent country, needed a supportive foreign reserve to meet its needs.

“The value of the naira and foreign investors’ confidence in the economy is tied to the level of foreign reserve available. As it depletes, foreign investors’ confidence in the economy is being eroded.

“The main source of forex inflow is earnings from crude oil export held by CBN in foreign reserves supported by diaspora remittances and export proceeds. As the major provider of forex in the economy, CBN can determine the value of the naira and influence imports. With the depletion of the foreign reserve, that power is diminished considerably,” Adonri said.

The country’s reserves have been affected by its weakened foreign earning capacity and rising import bills. In Q1, the country’s total imports rose to about 70 per cent of its total external trade, which was N9.8 trillion.

Its trade balance had been relatively good and positive until 2019 when the exports began to nosedive in relation to rising imports, increasing the pressure on the naira.

The domestic currency has continued to face pressure at both official and parallel markets. At the weekend, it traded around N502/$ at the black market. At the official Nigerian Autonomous Foreign Exchange (NAFEX) window, it closed at N411.5/$ on Friday, leaving the thorny arbitrage still at over N90 per dollar.

Some economists said the official market would need to be freed to close the differential to usher insanity and reduce the historic FX misalignments that disadvantaged the investment market. The Central Bank of Nigeria (CBN), in a move toward market liberalisation, ditched what used to be known as the official rate about two months ago, replacing it with the relatively liberal NAFEX window.

But experts have called for a more radical reform that will make NAFEX more market-responsive. The apex bank occasionally intervenes in the market to bridge the demand-supply gap. A fully liberalised market will end this and allow the unseen hand to take its full course.

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