NIGERIA’S external reserves have dropped to a two-year low of $39.32bn as a combination of dwindling oil revenue and a fall in foreign direct investment (FDI) have forced the government to delve into its savings to fund its budget.
Over the last four years, global crude oil prices from a high of about $100 a barrel to the current rate of $65 a barrel. With over 90% of Nigerian government coming from petroleum products, revenue has been hit hard, making it difficult for the government to fund its $28bn annual budget.
As a result, the government has had to delve into its reserves to meet its spending plans leading to them dropping to $39.319bn, representing a week-on-week decline of $298m from $39.612bn the previous week. In December 2018, Nigeria’s reserves stood at $39.353bn according to data from the Central Bank of Nigeria (CBN).
Nigeria’s foreign reserves have been declining since July 5 when they stood at $45.149bn and over the last five months, they have fallen by $5.83bn or 13%. This decline is driven by dwindling dollar earnings and reduced FDI inflow, especially foreign portfolio investment which accounts for 72% of total foreign investment in the first nine months of this year.
In addition, increased dollar sales by the CBN in its bid to defend the naira in the wake of rising dollar demand by foreign portfolio investors has hit hard. This has led to a depreciation in the value of the naira.
While the CBN is expected to sustain its intervention in the foreign exchange market to defend the naira, the persistent decline in reserves is causing concerns in the foreign exchange market and hence apathy to selling dollar holdings. Falling reserves always lead to a depreciation in the value of the naira, making imports more expensive.