Thursday, December 24, 2020 / 13:25 / CSL Research / Header Image Credit: Investopedia
Over the last few months, there has been strong pressure on the country’s foreign exchange reserves due to declining oil earnings and reduced capital inflows from risk-averse foreign investors. The fall in oil prices was largely driven by weakened demand for crude oil (linked to the global pandemic and the oil price war between Russia and Saudi Arabia). External reserves have been oscillating around $ 33-39 billion in the last 11 months. At the beginning of the year, the country’s foreign exchange reserves amounted to 38.5 billion US dollars, and from December 23, 2020, they dropped to 35.36 billion US dollars.
We recall that after the fall, caused by the pandemic, global oil prices and production / demand, Nigeria began to face significant foreign exchange shortages, which forced the Central Bank of Nigeria (CBN) to limit interventions in various windows. This led to a jump in the exchange rate in the parallel market, the I&E window exchange rate was devalued once, while the official exchange rate was devalued twice. However, in an effort to improve liquidity in the parallel market and reduce pressures on national foreign exchange reserves, Apex Bank recently announced a new policy on the inflow of remittances from Nigerians from the diaspora into the country with the aim of increasing remittance inflows. Yesterday, Naira was traded on the parallel market at c.NGN476.00 / US $ compared to N392.00 / US $ on the I&E window.
We do not expect significant reserve growth in the short and medium term in the future, other than any form of U.S. debt issuance and the effectiveness of Covid-19, which may help recover oil prices. Also, OMO maturities for the first quarter of 2021 amount to c.N4.1tn of which FPIs (who would rather repatriate their funds given low interest rates) own the majority of maturities. The Central Bank of Nigeria predicts further pressure on external reserves as deteriorating current account balances, falling oil prices and investor aversions that continue to affect capital inflows will continue to be major risks.
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