Why Nigeria’s external reserves stand at $41.39bn – MPC member

…As weakening oil prices, others affect reserves

A member of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) has explained why the nation’s external reserves are on a downward trend.

The MPC member, Mike Obadan, in his personal statement, explained that weakening in the global oil prices and intervention in the foreign exchange market have been affecting the nation’s external reserves.

For instance, foreign reserve which is monitored by the apex bank currently stands at $41.39 billion as at October 9, 2019 against $43.52 billion it stood in the corresponding date in October, 2018.

Obadan in his personal statement noted that high volatility in oil prices due to increasing geopolitical tensions and changes in demand for and supply of oil.

He said Organisation of Petroleum Exporting Countries (OPEC) reference basket monthly average crude oil price declined by 9.02 per cent from $64.71 per barrel in July 2019 to $59.69 per barrel in August.

“This is not good news at all for Nigeria. It has adverse implications for the country’s budget performance, external reserves and stability of the exchange rate as well as the desire for improved growth performance”, he said.

According to him, in recent months, external reserves have trended downwards, declining from $43.97 billion as at July 31, 2019 to $ 41.79 billion as at September 16, 2019 or by $ 2.181 billion or 4.9 per cent.

He disclosed that the decline in external reserves reflect weakening oil prices and CBN interventions in the foreign exchange market to ensure exchange rate and price stability.

He said the stock of reserves could finance over nine months of imports of goods and services at end July 2019, and there is need to watch this level considering that the reserves stock at the end of June 2019 could finance over 12 months imports.

“More importantly, the level of reserves has implications for capital inflows and outflows. A weakened net capital inflows position, due to weakening oil prices and external reserves position is helpful to exchange rate stability or the easing of monetary policy stance.

“This thus suggests the need to avoid monetary policy responses that could worsen the capital flows position and, hence external reserves and exchange rate stability,” he noted.

The Deputy Governor, Financial System Stability, CBN, Mrs. Aisha Ahmad, noted that external developments that include recent attack on Saudi Arabia’s crude oil processing facility, increased uncertainties plaguing the global business have led to volatility in the global oil prices, calling for urgency for domestic revenue diversification in the country.

In her words: “A key consideration for Nigeria has been the potential effects of these external developments on our investment competitiveness, reserves position and exchange rate stability.

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“Despite the slight decline in external reserves, its current level ($42.5billion as at 16th September 2019) is sufficient to ward off these threats in the medium term while more sustainable economic reforms are being explored.”

Commenting from a different perspective, the CBN governor, Mr. Godwin Emefiele, vowed at driving inflation rate in the country to a single-digit and building significant reserves buffers to defend the local currency.

“Since the key mandate of the CBN remains price, monetary and exchange rate stability, I am committed to driving inflation to single-digit levels and building sufficient reserves buffers to defend the naira”, he said.