External Reserves’ Drops by $971.4m in Q1 amid 49% Gain in Crude Oil Price

Kayode Tokede 

Amidst 49 per cent rally in crude oil price, Nigeria’s external reserve dropped by $971.4 million in the first quarter of 2022 (Q1),  the Central Bank of Nigeria (CBN) data on daily reserves’ movement has revealed.

Accordin to the CB data, the country’s foreign exchange buffer dropped to $39.55billion billion as at March 31, 2022 compared to $40.52billion it commenced 2022 amid steady increase in global oil prices.

In January, the external reserve had dropped by $478.95milion to $40.04billion, while in February, it depreciated further by $121.45million to $39.98billion from $39.86billion. 

However, in March 2022, the external reserve moved from $39.86billion to $39.55billion as at March 31, 2022, representing a decline of $317.8 million.

Analysis of the CBN’s data showed that the external reserve was at a threshold of $40billion in January and moved to $39billion February 2022. 

The global oil prices recently reached record high as oil and gas costs soar amid fears of a global economic shock from Russia’s invasion of Ukraine.

Further analysis of the CBN data showed that daily crude oil price has gained 49 per cent to close as of March at $119.06 per barrel from $80.07 per barrel it opened in 2022. 

Oil jumped to $128.27 a barrel as of March 9, the highest level for almost 14 years.

Experts have expressed that the current crisis in Niger-Delta relating to oil theft might be responsible for dwindling production, a major contributing factor impacting on external reserves growth on the backdrop of increase in global oil prices. 

They noted that the increasing CBN’s intervention in the foreign exchange market is also a contributing factor.

The Group Managing Director/CEO of NNPC Limited, Mallam Mele Kyari had recently disclosed that Nigeria oil production crashed to 1.15 million barrels per day due to rising cases of oil theft and pipeline vandalism in the Niger Delta.

He added that the increasing rate of vandalism has caused massive disruption in oil production, noting it was the worst the country has ever witnessed.

The Former president Chartered Institute of Bankers of Nigeria, President, Prof. Segun Ajibola attributed the dwindling external reserves to the crisis in Niger-delta and sustained foreign exchange interventions by CBN. 

He said: “Nigeria is having a peculiar oil theft challenge in the Niger-Delta and that is affecting our daily production quota. Government is still trying to confront pipeline vandalises, causing confusion at the points of production which is expected to have a negative impact on the country’s ability to meet the OPEC quota allocated to Nigeria.

 “Most of Nigeria’s oil transactions are paid for most times in 90-day times- it is called forward transactions. In some cases, we go into a swap agreement whereby those that refined products for Nigeria are paid back through crude oil. It means we are not selling but exchanging through crude oil.

“When we do forward transactions, the money does not reflect in the external reserve immediately. Those are the complicated issues in the global market that most people will not understand. Common man on the street will expect the steady hike in global oil price to impact on our external reserve but the underline challenges might delay it.”

Speaking, Prof. Hassan Oaikhenan of the Department of Economics, University of Benin blamed the mismanagement of the nation’s economy to dwindling external reserves in the first quarter of 2022. 

He said Nigeria is heavily indebted, stressing that earnings from crude oil are utilized in the payment of debt service.

According to him, while other countries are benefiting from a hike in crude oil prices due to Russia’s invasion of Ukraine, Nigeria is lamenting. 

In his words: “Nigeria spent the foreign exchange earnings on services of debt and importing refined petroleum products to which if we are creative enough to allow our refinery to work, it would not have been a major product for us as a country.

“Until our government becomes creative enough and understands that there is a need to diversify our means of foreign exchange earnings and stop the import of petroleum products after spending huge amounts of money, we will continue to be in the tight corner and continue to see the impact on foreign exchange rate.”

On his part, analyst at PAC Holdings, Mr. Wole Adeyeye said: “The bulk of our foreign exchange earnings come from the oil sector. However, Nigeria has not been meeting its OPEC crude oil production quota due to the oil theft and pipeline vandalism.

“Although, the price of crude oil jumped above $100 per barrel in the commodity market in Q1 2022, the dwindling crude oil production may have contributed to the setback recorded in the foreign reserves during the period. 

“With the recent efforts of the government to fight oil theft and pipeline vandalism in the country, we may likely see a slight improvement in the country’s foreign reserves in Q2 2022.”

Analysts at Cordros Securities in a report explained: “In our opinion, the CBN has enough supply to support the Foreign Exchange (FX) market over the short term, given inflows from the recently issued Eurobond ($1.2 billion) and the International Monetary Fund’s (IMF) Special Drawing Rights (SDRs) 

“However, foreign inflows are paramount for sustained FX liquidity over the medium term, in line with our expectation that accretion to the reserves will be weak given that crude oil production levels remain pretty low. 

“Thus, FPIs which have historically supported supply levels in the IEW (53.8per cent of FX inflows to the IEW in 2019FY) will be needed to sustain FX liquidity levels. Hence, we think (1) further adjustments in the Naira/Dollar peg closer to its fair value and (2) flexibility in the exchange rate would be significant in attracting foreign inflows back to the market.”

 A member of the Monetary Policy Committee (MPC) of the CBN, Mike Obadan, a Professor of Economics, University of Benin in his personal statement at the January 24-25 meeting said: “Ordinarily, high oil price should be good news to Nigeria. But the country’s subsisting production challenges and the heavy importation of refined petroleum products have so far prevented it from realising visible benefits from the high oil price regime in the form of accretion to external reserves, stability of the exchange rate and boosting of government revenue.”

He, however, called on the government to find lasting solutions to the oil production challenges and continued importation of petroleum products.

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