By Omodele Adigun
Nigeria’s external reserves have risen to the highest level in almost three years as it hit $33.11 billion last Thursday, data from the Central Bank of Nigeria(CBN) has shown.
That development has put the country’s reserves back at a level not seen since December 2014.
Last month, the reserves stood at $33 billion as at September 14, riding on the back of increased oil earnings.
The acting Director, Corporate Communications of the apex bank, Isaac Okorafor, had said that the accretion was a further indication that the economic recovery that started in the second quarter of the year would be consolidated.
Speaking on behalf of his principal, Godwin Emefiele, the CBN spokesman expressed assurance that the bank would work hard to keep growing the reserves and strengthening the economy.
On what the improved reserves mean to the economy, Uche Uwaleke, the Head of Banking & Finance Department of the Nasarawa University, Lafia, recently said:
“The nation is highly import dependent. This dependence has really eaten deep into our external reserves. The CBN requires the foreign reserves not only to intervene in the foreign exchange (forex) market, but also to maintain the stability of the local currency.” Recall that it was the process of making large amounts of foreign exchange (forex) available to the market that led to the appreciation of the Naira by over N85 in less than one week early this year. Through the series of its intervention, the apex bank was able to rejuvenate the currency from about N520 per dollar to its current level of N360/$.
Apart from performing the stated role, Uwaleke also explained other uses to which CBN can be put the reserves.
“The CBN also requires the foreign reserves to manage inflation because high exchange rate also rubs off negatively on inflationary pressure. Reserves are also required to make the country appear credit worthy because if your reserves drop to a particular level,it may make the country’s credit rating to fall. At some point, our reserves were getting very close to a point where it could not sufficiently finance three months of import, which is the threshold. And once your reserves drops below three months of import, then you are not credit worthy.
“A study by Tule et al (2015), which sought to determine an optimal forex reserves for Nigeria, established a minimum core foreign reserves level of $32billion (being equivalent of 7.2 months of import). The International Monetary Fund (IMF) recommends three months of import cover as a minimum benchmark for reserves”.
Recently, Emefiele explained the ordeal of the Naira at a public forum thus:
“We saw the average price of crude oil fall by nearly 60 percent from
US$114 per barrel in June 2014 to US$28 per barrel in February 2016,
before recovering to about US$50 per barrel today. These resulted in a
dwindling of our overall economic fortunes, as net inflows tapered and
pressures escalated in critical financial markets. As a result of
these global developments, expansion in the size of the economy has
been falling consistently. Available data indicate that Nigeria’s
Gross Domestic Product (GDP) contracted by 1.6 per cent in 2016
compared with a growth of 6.2 percent in 2014, and 2.8 per cent in
2015. Within this period, we also witnessed sharp increases in
inflation rate, reflecting supply constraints, exchange rate
depreciations, and adjustments to energy prices. In particular,
inflation rate rose persistently from 9.2 percent in July 2014 to 18.7
percent in January 2017. In addition to these, and as a reflection of
the significant reduction in inflows of US Dollars into the country,
heralded by the sharp drop in oil prices, the CBN witnessed a
significant decline in Foreign Exchange (FX) inflows and Reserves from
about US$42.8 billion in January 2014 to about US$23.7 billion in
October 2016 before recovering to slightly over US$30 billion today.
In terms of inflows, the bank’s FX earnings have fallen from as high
as US$3.2 billion monthly sometime in 2013 to as low as US$580 million
per month at some point.
“Despite these outcomes, the demand for FX has risen significantly.
For example, in 2005 when we had oil prices at about US$50 per barrel
for an extended period of time, our monthly average import bill was
₦12.4 billion. In stark contrast, the average import bill in the first
five months of 2017 is about ₦588.1 billion per month.The combined
effects of the aforementioned exogenous shocks, especially the fall in
oil prices and the capital flows reversals due to monetary policy
normalization in the United States, compelled several depreciations of
the Dollar-Naira Exchange Rate. Indeed, the Naira depreciated from
US$1/N155 in June 2014 to as high as over US$1/N500 in the parallel
market around February 2017.”