Foreign Reserves Down $2.03bn as Crude Oil Price Appreciates by 67.02% in Five Months

Kayode Tokede 

Despite the 67.02 per cent appreciation in global oil price, Nigeria’s foreign reserves depreciated by $2.03 billion in five months of 2022 on the backdrop of Central Bank of Nigeria (CBN) sustained interventions.

According to numbers released by the CBN, Nigeria’s foreign reserves dropped to $38.48 billion as at May 31, 2022 compared to $40.52 billion it commenced 2022 amid steady increase in global oil prices.

At $38.48 billion as of May 2022, the foreign reserves dropped lowest since October 08, 2021 when it was hovering around $38.39 billion.  

The monthly breakdown revealed that the foreign exchange buffer dropped by 943.07million in May 2022, the highest decline in a month, followed by $478.95 million decline in January 2022. 

For the month of February and March, it also depreciated by $121.45 million and $317.8 million, respectively. However, in April, the foreign reserves added $41.5 million to close at $39.58 billion from $39.54 billion it opened in April 2022. 

The decline in foreign reserves is coming on the backdrop of steady increase in global oil prices as gas costs soar amid fears of a global economic shock from Russia’s invasion of Ukraine.

The CBN in the numbers published on its official website disclosed that daily crude oil price has appreciated by 67.02 per cent in 2022 so far, reaching $133.73/barrel from $80.07/ barrel.

Mr Robert Asogwa, who is a member of the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC), had in his personal statement at the end of March 2022 meeting said the large oil thefts in the Niger Delta Region has diminished the possible benefits to the country as oil production level has dropped consistently. 

“However, the current level of reserves is still adequate to shield the economy against external vulnerabilities,” he added.

However, 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 foreign 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.

A check on Naira at the Investors & Exporters Foreign Exchange (I & E FX) window has depreciated by 0.48 per cent or N1.98 against the dollar from N412.67 against the dollar at the central rating to N415.15 against the dollar as at May 31, 2022.  

The International Monetary Fund (IMF) had warned that Nigeria’s foreign reserves could fall to $29.1billion by 2024 on the back of lower oil prices, restricted Eurobond market access, and higher capital outflows.

According to the report, the country’s foreign position is weaker as foreign buffers are limited.

The Washington-based lender said, “High interest payments relative to fiscal revenues expose Nigeria to interest rate and growth shocks.”

Commenting, 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.”

He explained further that: “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.”

Analyst at PAC Holdings, Mr. Wole Adeyeye explained that 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 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.”

The Deputy Governor, Corporate Services, CBN, Edward Adamu in his personal statement at the MPC stated that the war between Russia and Ukraine is unfolding in multiple directions in domestic economy.

According to him, “First, crude oil prices are high and could remain so for some time. Unfortunately, this is neither translating to more revenues for government nor increased accretion to the country’s external reserves. Under this condition, the cost of subsidy on PMS will increase, further limiting the fiscal space for supporting growth. 

“Other downside risks to growth emanating from the war in Ukraine include rising gas prices as well as cost of some intermediate goods. Manufacturing and agriculture could take a hit from these developments.

“In view of these prospects, it appears to me that domestic output recovery is severely threatened. In effect, the CBN cannot at this time relent in supporting growth using monetary policy and development finance interventions which have so far proved to be among the economy’s critical safety nets.”