Owing to the weak macroeconomic environment, Nigeria’s foreign exchange (FX) reserves dropped to a six-year low of $32.87 billion at the end of December, data obtained from the Central Bank of Nigeria (CBN)’s website has revealed.
The decline is significant, considering that the reserves had peaked at $47.63 billion in June 2018. The Nigerian economy has performed poorly over 12 months owing to the whirlwind of policy changes carried out by the old and new administrations of former President Muhammadu Buhari and President Bola Tinubu.
Although the removal of fuel subsidies and the unification of FX windows initially had positive effects on economic indices in May and June 2023, subsequent reforms have since slowed down the growth of the economy.
For instance, the naira depreciated by over 50 per cent during the year under review, making it the third worst performing global currency, with analysts attributing the development to the unification of the FX windows and the CBN’s efforts to support the local currency.
By December 2023, the dollar reserves of Africa’s largest economy had slumped to a level not seen since September 2017, settling at $32.16 billion.
The data conflicts with the estimation of J.P Morgan that Nigeria’s net foreign reserve at the end of 2021 stood at $3.7 billion.
According to reports, the apex bank has been selling dollars to defend the naira, leading to a depletion of foreign exchange reserves. This intervention by the CBN, is a response to the challenging economic conditions, including a backlog of unresolved forwards, unfulfilled commitments of dollar inflows and a two decade high in inflation.
This has resulted in low figures of total foreign transactions recorded on the floor of the Nigerian Exchange Limited (NGX), standing at N362.75 billion as against total domestic transactions amounting to N2.871 trillion in 11 months of 2023.
Furthermore, Daily Sun tracking the sale of dollars at the parallel market, revealed that the dollar (at the time of this report) was sold at N1,214/$1, while it stood at N1,043/$1 at NAFEM.
The CBN had previously promised to clear FX backlogs within a few weeks.
But analysts are of the opinion that only a fraction of the total backlogs have been cleared. This, insufficient FX alongside the harsh operating environment led to multinationals leaving the country.
Reacting to the development, analysts at Afrinvest, in their Nigerian economic and financial market review for 2023 and 2024 outlook titled; Pulling back from the Precipice, noted that the year 2023 was a year of two halves when considered from the prism of fiscal and monetary policy actions.
They noted that despite the emergence of the new administration in the second half of 2023 and its immediate roll-out of some market friendly reforms, Nigerians are yet to feel any sign of relief.
“Nigerians are yet to bask in the euphoria of a new administrative government despite its reforms. This then begs the question of whether the strategies of the new government are capable of pulling Nigeria back from the precipice. Hence looking at the New Year, economic outcomes would depend on how the current administration is able to carry through with its reforms, improve business environment to end recent spate of closure by mid and large-sized business entities, improve national security, enhance internal shock absorbers to external risks and narrow structural gaps”, they said.
Source: https://sunnewsonline.com/economy-weakens-as-fx-slumps-to-32-87bn/