Forex demand pressure bleeds $2.22b from external reserves

Forex demand pressure bleeds $2.22b in 4 months

By Jeph Ajobaju, Chief Copy Editor

External reserves have bled $2.22 billion under unrelenting demand in the foreign exchange (forex) market, according to Central Bank of Nigeria (CBN) data which shows a drop to $36.96 billion by 16 December from $39.18 billion in August.

The CBN listed four factors responsible for the pressure – low oil and gas revenue, foreign loan repayment, global inflation, and electing spending.

“The level of external reserves remained a key factor in the stability of the financial system. Downside risks to the external reserves include: Low inflows from crude oil & gas revenue.

“The non-receipt of inflows from crude oil and gas sales despite the rise in oil prices has continued to impact negatively on accretion to the reserves. This was attributed to reduction in crude oil production, among others,” the CBN explained in its Financial Stability Report, per Vanguard.

“Rising foreign loan repayment obligations. The increase in the foreign debt profile is an indication that foreign debt service payments are likely to increase, and would negatively affect the level of reserves.

“Global inflationary pressures. Global inflation is expected to remain elevated, a situation that was previously anticipated, necessitating the hike in interest rates by the Fed and other major central banks.

“This scenario poses a threat to reserves accretion as foreign investors move assets from emerging economies to advanced economies for expected higher returns.

“Lead-up to the 2023 general elections. There is the expectation of increased foreign exchange demand pressure resulting from uncertainties surrounding the conduct of the 2023 general elections.”

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External reserves reduce to $37.7b, the lowest this year in October

External reserves slid to $37.7 billion on 18 October, the lowest this year at the time, highlighting the turbulence in forex where demand pressure in the black market is high.

Foreign reserves have been on a downward trend due to the continuous intervention by the CBN in the official forex market to maintain the stability of the naira.

Foreign reserves are mostly funded through a combination of government’s share of crude oil exports, foreign loans or grants, and capital importation.

The CBN uses the reserves to augment forex demand at the I&E window even though the United States dollar is sold at official rates, rather than the going rate in the black market.