Naira declines as external reserves shed $2.69 billion

By Motolani Oseni

The Nigerian currency, at the Investors & Exporters (I & E) FX window, fell marginally by 0.04 per cent, as Nigeria’s external reserves recorded a decline of $2.689 billion in 2020.

The external reserves movement statistics obtained from the Central Bank of Nigeria (CBN) at the weekend showed a decline from $38.312 billion where the reserves stood on January 13, 2020, to the latest figure of $35.623 billion as of Thursday, August 13, 2020.

But when compared, the $35.623 billion from the $35.678 million declared a week earlier on August 6, 2020, represents a drop of $20.39 million.

Breakdown of the data by Daily Times revealed that the country’s external reserves have been dropping since the second month of the year when the deadly coronavirus first broke in the country, with the figure put at $37.231 billion on February 13, against $38.312 billion where it stood on the same date in January.

It is noteworthy that the reserves figure has been on the decline since the beginning of the year when considered alongside the $36.138 billion recorded statistics for March and $37.231 billion declared in the previous month.

Further analysis of the data also showed that the foreign reserves figure on 14th of April reduced to $33.979 billion, but it was observed that the movement started gaining momentum in May, as it rebounded to $34.911 billion on the 13th of the month, before gaining further to $36.348 billion in June. But it shed marginally to $36.128 billion on July 13.

READ ALSO: Naira stables ₦386.63/$ at I & E FX window

Foreign exchange reserves are assets held on reserve by the CBN in foreign currencies. They are used to back liabilities and influence monetary policies, which comprise foreign bank notes, deposits, bonds, treasury bills and other foreign government securities.

These assets serve many purposes but are most significantly held to ensure that a government or its agency has backup funds if their national currency rapidly devalues.

According to the International Monetary Fund (IMF), these reserves may be used for direct financing of international payments imbalances or for indirect regulation of the magnitude of such imbalances through intervention in foreign exchange markets in order to affect the exchange rate of the country’s currency.

In recent times, the nation’s external reserves came under pressure due to the drop in oil receipts and the intervention of the CBN in the foreign exchange market.

Meanwhile, Naira was quoted at ₦386 to the dollar at the I & E FX window on Friday, compared to ₦385.83 on Thursday, with total transactions turnover of $21.09 million, which was lower than an improved $41.48million on Thursday. This represented a decline of $20.39 million in one day.

At the parallel market, the naira remained flat against the euro, dollar and pound to close at ₦547, ₦475 and ₦605 respectively.

Experts said the outbreak of the coronavirus, which led to a global economic slowdown, fall in the price of crude oil and loss in the inflow of dollars into Nigeria, had put a lot of pressure on the nation’s reserves in recent times.

They said the associated public health concerns of the coronavirus had led to factory closures in China, a substantial drop in imports, widespread travel restrictions around the world and cancellation of many conferences, sporting events, business travels and foreign exchange orders.

The drop in the crude oil price raised speculations among Nigerians in general; a development that put serious pressure on the foreign exchange market, thus making the naira to exchange with a dollar at ₦473 in the Bureau De Change (BDC) segment of the forex market.

Speaking on harmonising foreign exchange rates by the CBN, the Head of Research and Business Development at PanAfrican Capitals, Moses Ojo, said, “The timeframe and the modality for the unification of the exchange rate is supposed to have been released by the CBN. It is not something that should take time. For me, it just shows a lack of sincerity on the part of our policy-makers in that regard.”

He added that the convergence of the exchange rate with a single band would bring about transparency in the Nigerian foreign exchange market.

Also, the Professor of Finance and Capital Market, Uche Uwaleke said the recent upward adjustment of the exchange rate by the CBN is no doubt largely in response to the conditions for drawing down on the recent International Monetary Fund (IMF) RFI facility.

He explained that the development is also consistent with the Economic Sustainability Plan of the government which has made provision for the unification of rates across all the forex windows.

Uwaleke, however, noted that the forex unification is in variance with the Medium Term Expenditure Framework (MTEF) and, by implication, the 2020 budget which was based on an official exchange rate of ₦360 to the dollar. Even the 2021-2023 MTEF is equally predicated on ₦360 per $1.

According to him, except these are quickly revised in the light of this unification effort, the country’s annual budgets in the medium term are literally dead on arrival.

“In the short term, the implication of this devaluation is that it will likely hurt the economy and bring some pains to most Nigerians, given the country’s import dependent nature and over-reliance on oil revenue.

“The cost of importation of critical raw materials for Small and Medium Enterprises (SMEs), including import of petroleum products which hitherto were subsidised at the official window, will rise.”

He explained that the result will be more inflationary pressure on an economy already challenged by COVID-19 and insecurity which have combined to disrupt output especially in the agriculture sector.