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More pressure on Nigeria’s fx reserves as $1 bln external debt falls due

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While the Nigerian economy can be said to have finally returned to pre-pandemic levels, the FX market clearly remains under pressure from rising dollar demand and year-on-year weakening in FX earning capacity of the economy.

This essentially means unrelenting pressure on the nation’s sacred economic variable, the exchange rate.

Prior to the pandemic, the nation’s external reserves hovered around $34 billion levels and more than two years later, it stands at $39.7 billion, apparently enjoying the benefits of recent $5.25 billion Eurobond issuances.

Organic accretion into the reserves has been unimpressive as FX earning sources have underwhelmed.

First, despite oil prices rebounding from trough levels of $22.7/bbl in March 2020 to above $100.0/bbl in March 2022, the nation’s external reserve is yet to benefit from the rebound as oil production has continued to disappoint.

Oil theft and years of underinvestment in the nation’s oil infrastructure have come home to roost, preventing the economy from enjoying the fiscal and FX gains of higher oil prices.

Further contributing to the FX woes, the nation’s import bill has continued to rise due to global inflationary pressures and stronger consumer demand.

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This has led to a negative trade balance which continues to pressure scarce FX resources.

The situation worsens as many investors who exited the economy prior to the pandemic are unwilling to return due to lack of long-term clarity on FX situation as well as policy normalisation in advanced economies.

Recently, noticeable signs of pressure on FX have been observed, evidenced by further FX supply controls implemented by the CBN.

For example, commercial banks across the country have communicated a cut in monthly FX transaction limit to $20 while CBN’s FX sales to importers have waned.

Looking ahead, we see more pressure coming as the CBN will be focused on helping the FG pay its upcoming  $1 billion worth of foreign debt obligations.

Thus, summer FX demand will be a key pressure point for parallel market rates. In the long run, increasing the economy’s FX earning capacity remains the ultimate route to resolving Nigeria’s FX crisis for good.

Thus, one wonders if proper implementation of the CBN’s RT200 FX Programme could be the key to making perennial FX pressures a thing of the past. ~United Capital 

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