•As $7.4bn accrues from SDR, Eurobond
•But IMF is calling for further boost
By Babajide Komolafe
Nigeria’s external reserves is set to hit $41 billion, the highest in two years, following an eight weeks accretion triggered by inflow from the Eurobond proceeds and the Special Drawing Rights (SDR) Allocation to Nigeria by the International Monetary Fund (IMF).
In a bid to boost global liquidity, the IMF, in August 2021, released $650 billion SDR to member countries, with Nigeria receiving $3.35 billion out of the $275 billion allocated to emerging economies and developing countries.
In addition to this, the Federal Government, as part of efforts to finance the N5.2 trillion 2021 budget deficit, raised $4 billion through the Eurobond offer issued last month.
These developments resulted in $7.35 billion dollar supply into the country, which led to an eight weeks accretion to the nation’s external reserves.
External Reserves trend
Data from the Central Bank of Nigeria (CBN) showed that the external reserves rose steadily to $40.76 billion on Wednesday October 20th from $33.34 billion on Tuesday August 24th, indicating $7.17 billion or 22 per cent increase, indicating that this vital macroeconomic and fiscal indicator has so far grown by 22 per cent in the second half of the year (H2’21), rising by $7.44 billion to $40.76 billion from $33.32 billion at the end of the first half of the year (H1’21).
From $33.32 billion at the end of June, the reserves rose by 0.2 per cent, month-on-month (MoM) to $33.38 billion in July. The reserves rose further by 0.68 per cent MoM to $34.02 billion in August, and again by 2.76 per cent MoM to $36.78 billion at the end of September.
The above trend is in sharp contrast to the $2 billion or 0.5 per cent decline suffered by the reserves in the first half of the year (H1’21) to $33.37 billion on June 29th 2021 from $35.37 billion on December 31st 2020.
While the reserves rose in January by $929 million or 2.6 per cent, MoM, to $36.3 billion from $35.37 billion in December, courtesy of rising crude oil prices, they however fell in February by $1.2 billion or 3.3 per cent, MoM to $35.09 billion following increased dollar sales by the CBN. This trend persisted in March as the reserves fell again by $279 million or 0.7 per cent, MoM to $34.82 billion.
The marginal decline in March followed a two week upward trend in reserves, which commenced on March 18th from $34.42 billion to $34.82 billion at end of the month, resulting in $37 million accretion in the reserves.
However, the reserves recorded a marginal increase of 0.2 per cent, MoM, in April, but resumed its downward trend in May, falling by 1.7 per cent MoM decline to $34.27 billion.
The trend worsened in June as the reserves fell again by 2.5 per cent MoM to $33.37 billion on June 29th.
Rising crude oil price
In addition to the $7.35 billion inflow from the Eurobond and SDR, the rising trend in external reserves in H2’21 is also driven by the steady rise in price of crude oil during the period.
Vanguard Public Finance findings showed that the price of the nation’s Bonny Light crude oil rose by 19 per cent to $84.67 per barrel on October 19th from $78.01 per barrel on August 24th.
The steady increase in the price of crude oil is driven by stronger than expected recovery in growth in the global economy and demand for crude oil.
With analysts, including J.P Morgan and Bank of America, expecting the upward movement in crude oil price to persist and possibly hit $100 per barrel this year, the nation’s external reserves is expected to rise further to $41 billion, the highest in two years, since October 16th 2019, when it stood at $41.03 billion.
Speaking in this, analysts at Financial Derivatives Company (FDC) said: “We expect the accretion in the external reserves to continue in the near term due to increased inflows from SDR, Eurobond issue and higher oil revenues.”
IMF calls for more
Meanwhile, the IMF has advised Nigeria and other countries in the Sub-Saharan African facing exchange rate pressures to pursue reserve accumulation, and avoid using their external reserves for intervention in the foreign exchange market.
According to the IMF, given the low level of reserves and weak external balance, reserve accumulation is the appropriate policy now.
The position of the IMF was contained in its October Regional Economic Outlook for Sub-Saharan Africa.
The IMF said: “ Exchange rate pressures have generally eased over the past year, particularly compared with the peak of the crisis in 2020 . Over this period, several countries have shifted toward more flexibility, but more can be done.
“For instance, in Nigeria, after welcome steps toward exchange rate unification earlier this year, the recent removal of parallel market data and measures to curtail foreign exchange supply led to uncertainties and a sharp rise in the parallel market premium.
“For those countries experiencing upward pressure on their exchange rates over 2021, some have taken advantage of the opportunity to build their reserves. Countries should generally try to ensure, through appropriate sterilization, that such interventions do not support an unsustainable policy mix. In the context of sub-Saharan Africa, where reserve levels are generally low and external balances are still weak in relation to desired policies and medium-term fundamentals, reserve accumulation may be warranted.”