Nigeria hits a puzzling roadblock on its path to an economic recovery

Nigeria hits a puzzling roadblock on its path to an economic recovery [Nairametrics]

An anomaly has been spotted in Nigeria's path to its economic recovery as the country's foreign exchange reserves (forex) depleted by over 2 billion in the space of a month. This is coming amidst news that the country's currency, the Naira is gaining owing to government-implemented economic policies. However, it would seem that this gain may be coming at the expense of the country's foreign reserves.

A report by Bloomberg revealed that concerns have been raised that Nigeria's central bank is cutting through its dollar holdings to maintain the Naira, despite having promised to allow the currency to float more freely. The report notes that Nigeria is burning through its foreign exchange reserves at a rate not seen in four years.

The Bloomberg report reads partly, "Liquid reserves declined 5.6% since March 18, when the naira started its rebound from record-low levels against the dollar to $31.7 billion as of April 12."

"The CBN does appear to be using its FX reserves to clear the valid backlog, and return the naira to a realistic exchange rate," Charles Robertson, the London-based head of macro strategy at FIM Partners, stated. "My assumption is they hope to encourage others, local and foreign investors to start investing in the local currency and return private sector liquidity to the foreign exchange market."

As seen in the Nigerian business news publication; Nairametrics, Nigeria's forex reserves went from $34.45 billion recorded on the 18th of March, 2024, to $32.29 billion, as of April 15, 2024.

The report notes that this is the lowest level experienced in six years, at exactly September 25, 2017, when the reserves were $32.28 billion.

About a week ago, the central bank foreshadowed this decline by reporting a dramatic forex decline. According to the apex bank, the country's foreign reserve fell by almost $1.02 billion in 18 days.

This comes after reports at the end of March that Nigeria's economy saw an unprecedented boost with an infusion of $1.5 billion in less than a week, after the bank's successful resolution of all foreign exchange backlogs, and an influx of diaspora remittances.

The report by Nairametrics, lists three possible reasons why the forex continues to drop including: Nigeria's debt and financial obligations, which require Nigeria to dip into its forex coffers; low production of oil, seeing as Nigeria's oil production has been on a downward slope; and finally, the CBN's increased intervention in various FX windows, which is intended to stabilize the local currency.

Africa's largest economy still maintains a substantial buffer of foreign exchange reserves as a result of increases in oil prices and multilateral loan inflows. The International Monetary Fund estimates that gross reserves of around $32.6 billion are sufficient to cover imports for roughly six months.

However, the recent forex decline could affect investor confidence, which has weakened significantly within the last decade.

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