By Dipo Olowookere
Despite the recent rise in the price of crude oil in the global market, the foreign reserves of Nigeria, one of the producers of the black gold, have continued to depreciate.
Nigeria, Africa’s largest economy in Africa, relies heavily on crude oil to earn foreign exchange, but despite the huge money the country makes from the sale of the commodity and a steady supply of the oil, its external reserves are going down, causing some observers in the country to worry what the problem really is.
Business Post reports that the reserves grew by $9 billion in H1-18 to close at $47.9 billion, but lost $3.5 billion in the third quarter of this year to settle below $45 billion.
According to analysts at United Capital Research, in Q3 2018, oil prices increased by 4.1 percent, trading over $80 per barrel.
Clearly, pressure on the reserves gives an insight into the sentiment playing out in the currency market despite the implementation of the Nigeria-China currency swap program this year.
Although relatively stable compared to peers across emerging and frontier markets, the Naira shed 0.7 percent in Q3-18 at the Investors & Exporters window as the demand for the greenback strengthened.
United Capital said pressure on the reserves was driven by two major factors: the sharp reversal of portfolio funds which constitute the bulk of capital importation into the Nigerian economy from mid-2017 to mid-2018, due to rising treasury yields in the US and the increasing political tension in the Nigerian economy with a traditional effect of driving off capital inflow into the country.
“Going forward, we expect the pressure on the local unit to be sustained as the build-up to the 2019 election reaches the climax,” the firm said.
Thus, the external buffer will further nosedive as the Central Bank of Nigeria (CBN) pushes forward to defend the Naira.
“On the bright side, we do not see a devaluation in the near term, given that Nigeria’s current $43.6 billion reserves covers up to 12 months of import,” it said in a recent report.
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