Nigeria’s external reserve reached the $44 billion mark at
the end of March 2019. According to the data released by the Central Bank of
Nigeria (CBN), Nigeria’s gross external reserve hits $44.14 billion.
As at the 26th of March 2019, gross external reserve stood
at $44.14 billion, up from $44.04 billion the previous day. This implies that
Nigeria’s foreign exchange market gained as much as $102.93 million in just one
day.
The $44.14 billion external reserve marks a six months high
The CBN data shows that foreign reserve increased to an all
time high in six months. A quick check at the historical foreign reserve data
shows that Nigeria’s foreign reserve recorded value above the $44.1 billion
mark in September 2018.
Afterwards, the foreign reserved began to dip the following
month.
However, six months all-time low was recorded in November
Within the period, foreign reserve witnessed an all-time low
in November 2018. Data shows that for the past six months, Nigeria’s foreign
reserve recorded $41.52 billion in November 22nd 2018, which represents an
all-time low in six months.
The rise in reserve is due to recent surge in oil price
An earlier report by Nairametrics revealed that analysts
have predicted that oil price will hit $70 per barrel in 2019.
In the last week, Brent oil price rose an average of $67.73,
with reports showing that oil price is witnessing its biggest quarterly rise
since 2009.
As at 25th March 2019, Brent oil price stood at $67.37 per
barrel, while West Texas Intermediate (WTI) dropped to $58.71 per barrel.
According to data obtained from the US Energy Information
Administration (EIA), in the last six month, Brent crude oil price recorded
all-time average low in December 2018 at $51.44 per barrel.
What are foreign reserves?
Foreign reserves are the foreign currencies held by a
country’s Central Bank. They are also called foreign currency reserves or
foreign exchange reserves.
Why a country holds Reserves?
The foreign reserve could be held for several purposes,
among others include keeping foreign reserves to Safeguard the value of the
domestic currency and also to make a timely meeting of international payment
transactions.
Similarly, the Central Bank holds reserves as a form of
wealth accumulation portfolio for future consumption purposes. Further, the
periodical intervention by CBN to manage the exchange rate is achieved with the
aid of Foreign exchange reserves.
The implication of Nigeria’s rising foreign reserve on the
economy
According to a publication of the Asian Development Bank
Institute, although increased foreign exchange reserves may cause a decline in
consumption, it can also enhance investment and economic growth.
One may argue that an increase in foreign exchange reserves
improves the current account, and consequently enhances economic growth. In the
short-run, aggressive intervention could help maintain the competitiveness of
the tradable sector, and manifest itself in a massive accumulation in foreign
exchange reserves by the central bank.
An earlier report has also shown that the CBN injected a
total of $US39.9 billion in FOREX market in 2018, and the relative stability of
the exchange rate is traceable to the periodic intervention by the CBN. Hence,
the rising external reserve has been a buffer to stabilise the naira.
Any downside?
The CBN may have $44.14 billion within its disposal, which
has made it become a source of foreign exchange at the investors’ and
exporters’ window (I&E), but this does not guarantee long-run stability.
Amidst the current economic situation, CBN has a choice to
either build foreign reserves or maintain the current position of the currency
by frequent intervention. This is so because naira stability requires drawing
from the reserves to defend the currency.
However, if the main source of foreign exchange (oil)
plummetted, foreign reserves will dip which may expose naira to depreciate
further.
By Bamidele Samuel Adesoji
