CEM REPORT, FINANCE | Nigeria’s economy saw a welcome boost in foreign currency (FX) inflow during August 2023, with a 2.9 per cent increase to $2.33 billion compared to the previous month. This positive development was primarily driven by increased inflow from autonomous sources, according to the Central Bank of Nigeria (CBN).
However, beneath this apparent progress lies a worrying reality. Despite the increased inflow, Nigeria’s foreign reserves continued to decline, dropping to $32.98 billion by the end of August, a 0.99 per cent decrease from the previous month. As of December 4, 2023, the reserves have further dwindled to $32.88 billion, raising concerns about the country’s ability to meet its import obligations.
According to the latest data from the CBN, the FX reserves have dropped to $32.88 billion as of December 4, 2023. The report indicated that the external reserves, which amounted to $32.98 billion were sufficient to finance 6.3 months of imports for both goods and services or 8.7 months for goods alone, based on the import values of the second quarter of 2023.
In addition, the ratio of reserves to short-term debt was 115.92 per cent, which surpassed the minimum requirement of 100.0 per cent.
FX Flow Deficit
The report released by the CBN revealed that the total amount of FX that entered the economy in August was US$5.71 billion, which was 5.8 per cent higher than the US$5.40 billion recorded in the previous month.
However, the FX that left the economy also increased by 8.0 per cent, from US$3.13 billion in July to US$3.38 billion in August.
The report showed that the FX inflow through the Bank decreased by 5.9 per cent to US$2.44 billion in August 2023, compared with US$2.59 billion in the month before. On the other hand, the outflow through the Central Bank went up by 6.3 per cent to US$2.98 billion from US$2.80 billion in July 2023.
The report also indicated that the autonomous inflow, which came from sources other than the Bank, increased by 16.6 per cent to US$3.28 billion in August, from US$2.80 billion in July. Likewise, the autonomous outflow, which went to destinations other than the Bank, rose by 22.3 per cent to US$0.40 billion in August 2023, from US$0.32 billion in July 2023.
The report stated that the net inflow through autonomous sources was US$2.88 billion, which was higher than the US$2.48 billion in July 2023. The CBN, however, recorded a net outflow of US$0.55 billion, which was more than the US$0.22 billion in the previous month.
Analysts point to several factors contributing to the decline in reserves and pressure on the naira. These include limited FX earnings from both oil and non-oil exports, coupled with increasing demand for foreign currency. This imbalance has triggered a speculative onslaught on the naira, further weakening its value.
“There is a serious confidence crisis in the foreign exchange market fueling an unprecedented speculative onslaught on the naira,” said Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise.
Experts warn that the current situation poses significant challenges for the Nigerian economy, including increased business costs for businesses, higher inflation and reduced consumer purchasing power; soaring energy costs exacerbated by inflationary pressures.
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Importantly, the declining reserves make it increasingly difficult for the government to meet its debt commitments.
To address these issues, economists have urged the government to implement comprehensive reforms aimed at boosting foreign exchange earnings and restoring confidence in the naira. These measures could include diversification of the export base especially a vast reduction in the reliance on oil exports and promoting non-oil exports; improving the investment climate: particularly creating a more attractive environment for foreign direct investment.
Also, strengthening fiscal discipline: in the area of implementing sound economic policies to reduce budget deficits.l; promoting transparency and accountability in the FX market.
Taking decisive action to address the underlying causes of the naira weakness and declining reserves is crucial for ensuring long-term economic stability and growth in Nigeria.
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