During the week, reports from the website of the Central Bank of Nigeria confirmed that the external reserves stood at $39.8 billion, the first time it dropped below $40 billion in almost two years.
The external reserves depleted by another $1.1 billion in less than 5 weeks, as this is the highest fall it had recorded in the past 22 months.
According to the latest data obtained from the Central Bank of Nigeria (CBN), Nigeria’s external reserves dropped from $40.9 billion on 18th October to $39.8 billion in 26th November 2019.
Why the reserves are falling
Several factors determine the rise or fall in external reserves. In Nigeria, it has always been crude oil earnings and foreign investment inflows into the country.
While providing reasons for the latest decline in the country’s reserves, the CBN disclosed in its monthly economic report for October 2019 that the decline was due, mainly, to foreign exchange market interventions, direct payments and foreign exchange sales at the I&E and SMIS intervention window
Although the decline in the country’s external reserves has coincided with recent fluctuations in global oil price with Brent crude oil hovering around $62 a barrel, the depletion in reserves has more to do with other factors other than the global events.
For instance, analysts have argued that as capital flows out of the economy, the CBN would continue to actively intervene in the foreign exchange market to keep the Nigerian Naira in check.
A quick look into capital flows on the Nigerian capital market shows that foreign portfolio outflow stood at N428.8 billion in October 2019 (YTD), while inflow was N363.9 billion. This means capital outflow outpaced inflow on the Nigerian bourse.
With the latest decline, the external reserves position could only finance 5.1 months of imports of goods and services, and 8.7 months of goods only, using the import figure for second-quarter 2019.
What this means for 2020
With a large chunk of the country’s reserves also used in servicing external debt, the reserves may just continue to deplete, and this may pose a serious threat to the Nigerian economy going into 2020.
Already, more borrowings to fund the 2020 budget has been mooted by the government. This means as foreign portfolio investment declines, rise in debt servicing and continued intervention by the CBN in the FX market will trigger more pressure on the country’s reserves.
The drop in reserves means available buffer for the CBN to stabilise the exchange rate continue to weaken, suggesting devaluation may be on the cards if things get worse next year.