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TALKING MONEY with Yusuf Akogu

Talking Money With Yusuf Akogu: Diary Of Nigeria’s External Reserves

By Yusuf Akogu
According to the IMF definition, international reserves consist of the sum of the country’s foreign exchange, its reserve position in the IMF, its monetary gold reserves, and the United States dollar value of SDR (Special Drawing Rights) holdings by its monetary authorities.
Countries are interested in accumulating foreign reserves to ensure macroeconomic stability. There has been some debate whether to beef up the level of nations’ foreign reserves or make it lower, especially in developing countries like Nigeria.
In 2020, international reserves for Nigeria was $36,729 Billion. Though Nigeria’s international reserves fluctuated substantially in recent years, it tended to increase through 1971 – 2020 period.
However, this data is based on the CBN statistics obtained through PFI capital Research. It showed that from April 3rd 2006, the gross external reserve was $36.2 billion and rose to $43.90 billion as at December 19 (the highest for the year 2006). This represents 21.27% increase in external reserve during the 8 months period. During this period, real GDP growth was 6.73% as the real GDP grew from N37.47 trillion in 2005 to N39.99 trillion in 2006. Inflation during this period was also within 1-digit as it averaged 8.38% in 2006. On a MoM basis, Nigeria recorded negative inflation rate in June (-0.2%), October (-2.5%), November (-0.7%) and December (-0.8%).
This shows the growth was stable as inflation was at the desired level and there was relatively increased domestic production of goods and services. It was also during this period that Nigeria successfully met the condition of debt relief from the Paris Club, which had its debt settled with the group.
By 2007, the gross external reserve grew from $41.90 billion as at January 4, to $52.47 billion as at December 13, representing a growth rate of 25.27% during the period or an addition of $10.57 billion to the gross external reserve during the period. Average inflation rate in 2007 was 5.42% which is the lowest inflation rate Nigeria recorded during the years under review. The inflation rate declined by 140bps from 8% in January 2007 to 6.6% YoY in December 2007. Inflation rate on MoM basis was also low and which showed deflation in January, October and November MoM in 2007. Nigeria also enjoyed increased real GDP growth during this period at 7.32%.
In 2008, Nigeria recorded highest gross external reserve during the years under review with external reserve hitting the highest point of $64.73 billion on August 11th, 2008. This was a period of boom as the equities market also rallied while hitting an all-time high of 64,834.33 points in March 2008 (before dropping to 20,436.40 points in April 2009 as the global financial crisis hit the market). By December 30th, 2008, external reserve already dropped to $52.60 billion which represents -18.74% decline from its all-time high of $64.73 billion in August 2008. Average import cover during the year was 16.7 months.
Headline inflation grew faster within this period as it averaged 11.52% while real GDP growth grew at a slower rate of 7.2%. The financial crisis majorly had effect on Nigeria’s financial and trade sectors as it manifested majorly from liquidity and credit crunch as well as significant reduction in confidence in the banking system. Hence, impressive performance of the non-oil sector during the period, supported Nigeria’s growth throughout the crisis.
In 2009 and 2010, gross external reserve ended the year at $42.38 billion and $32.34 billion respectively. This shows that gross external reserve declined significantly by 19.43% in 2009 when compared to the December 30th, 2008 value of $52.60 billion. It also shows that the reserve declined by -23.69% in 2010 when compared to the 2009 ending value of $42.38 billion. These were the periods the financial crisis hits the peak on the economy as average inflation rate also grew fast to 12.59% in 2009 and 13.77% in 2010. Average official exchange rate also grew during the period as it was N150.30/$ in 2010 compared to N148.88/$ in 2009 and N118.57/$ in 2008. In essence, the average official exchange rate depreciated by 25.57% in 2009 and by 0.95% in 2010.
By 2011, the external reserve grew marginally by 0.93% to $32.64 billion as at December 2011 from $32.34 billion recorded in December 2010. Highest gross external reserve in 2011 was recorded on 4th March as the reserve hit a high of $36.49 billion. By the end of 2012, gross external reserve grew to $43.83 billion as inflation rate averaged 12.24% during the period while the economy grew at a slower pace of 4.21% in real terms. Oil price averaged $105.87/barrel in 2013, compared to an average of $109.45/barrel. This reflected in the external reserve which closed the year at $43.61 billion compared to $44.34 billion at the start of the year, representing a marginal decline of -1.65%. The economy however grew at a faster pace of 5.49% compared to 4.21% recorded in 2012 while exchange rate appreciated by 0.12% to N157.31/$1
For 2014 and 2015, the price of oil averaged $96.29/barrel and $49.49/barrel respectively. External reserve fell to $34.21 billion in December 2014 compared to $42.85 billion in December 2013, stemming from relative reduction in price of crude oil as well as oil pipelines vandalism activities in the Niger-Delta region. It was at this point that the recession bell rang. By 2015, the price of oil declined significantly by -48.60% to an average of $49.49/barrel while the gross external reserve also declined accordingly by -17.41% to $28.28 billion in December 2015 compared to $34.21 billion recorded in December 2014. Average inflation rate grew faster at 9% in 2015 compared to 8.05% in 2014 while the real GDP growth rate in 2015 slowed greatly to 2.79% compared to 6.22% recorded in 2014.
The Nigerian economy entered into economic recession in 2016  for the first time since 1991 as the real GDP growth for the year decline  to -1.58% due majorly to the slump in the price of crude oil, while average inflation rate was 15.62% and average official exchange rated skyrocketed to N253.49/$1 during the period. External reserve hit the lowest level of $23.897 billion on October 19th, 2016 while closing at $26.99  billion at the end of the year, the lowest since 2005. During this period, the CBN restricted foreign exchange on the importation of 41 items including toothpick. By April 2017, the CBN introduced the SMIS window to deepen the foreign exchange market and accommodate all FX obligations for importers and investors. Hence, the beginning of multiple exchange rate windows- CBN official, SMIS and I&E window. At the end of 2017, the country was back to positive growth rate as real GDP grew marginally by 0.82%. Average inflation rate however was higher (16.55%) when compared to the average rate in 2017 (15.62%). The exchange rate also depreciated by 20.63% to N305.79/$ while the gross external reserve stood at $38.77 billion by 29th December 2017 at an average import cover of 12 months.
Modest growth rate continued to 2018 when the Nigerian economy recorded real GDP growth rate of 1.91% in Financial Year 2018. During the same period, average inflation rate slowed down to 12.15% while the average official exchange rate slightly depreciated by 0.09% to N306.08/$ from the average official rate of N305.79/$ in 2017. The gross external reserve grew from $38.91 billion on 2nd January, 2018, to $43.12 as at December 2018 with the average import cover of 13.8 months, on the back of increased oil production and oil prices relative to the 2016 levels.
In 2019, the Nigerian economy grew by 2.27% in real terms, consolidating the fragile growth rates since the country was out of recession in 2017. Average headline inflation rate also grew at a slower rate of 11.39% while the average official exchange rate depreciated marginally by 27bps to N306.92/$ compared to N306.08/$ in 2018. The external reserve which was at $43.08 billion at the beginning of the year, ended the year lower at $38.62 billion. This showed that the external reserve shed $4.46 billion in 2019. Banking on optimism in external sector activities coupled with the US-China trade deal, as well as high oil prices, the economy was set for continued growth increases in 2020 until the COVID-19 pandemic hit the world which led to oil prices falling.
This was aggravated by the oil price war between Russia and Saudi Arabia which sent oil prices to 18 years low, which had negative impact on the external reserve of the country that fell to $33.44 billion as at 29th April. By 13th July, the gross external reserve increased by $2.69 billion to $36.13 billion on the back of the inflow from the IMF while the CBN keep having little activities in the forex window.
In June 2021, Nigeria’s economy suffers another hit in the half year as the country’s foreign reserves dropped by a whopping $2.1 billion, from $35.37 billion recorded as of 31st December 2020, to $33.32 billion as of 30th June 2021.
According to data obtained from the daily external reserve movement tracker, released by the Central Bank of Nigeria (CBN), the reserve dipped 5.3 percent year to date in June, despite crude oil, which is a major source of foreign exchange gaining over 46 percent in the same period.
The slump is largely attributed to the decline in crude oil earnings, majorly caused by the cut in production quota by the OPEC in order to stabilize the market as most economies move to recover from the downturn caused by the covid-19 pandemic.
However for the first time since June this year, the total amount in the external reserves of Nigeria reached $34 billion threshold.
Data obtained by The Summit from the Central Bank of Nigeria (CBN) showed that the foreign exchange (FX) buffers increased to $34.1 billion on Wednesday, September 1, 2021 from $33.5 billion seven days earlier.
Nigeria’s Central Bank expects foreign reserves to leap to as high as $40 billion by the end of September 2021, due to relatively steady price of crude oil in the international market.

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