Uche Usim, Abuja
The slow and steady depletion of the nation’s foreign reserves has been described as a frightening development that should be arrested with effective fiscal strategies.
A number of finance experts gave the charge on Thursday following a $2.2 billion decline in Nigeria’s foreign reserves in October 2018, the largest monthly slump since 2015.
Information from the Central Bank of Nigeria (CBN) shows that the reserves shed $2,243,157,059 in October, moving from $44,305,099,104 on September 30 to $42,061,942,045 by October 30, 2018.
The country’s foreign reserves, which swelled steadily in 2018, following improved oil prices, and hitting $47.8 billion in June, began plunging downwards suddenly, following shocks reverberating from the US market.
On September 26, 2018, the US Federal Reserve lifted its benchmark rate for overnight lending by a quarter of a percentage point to a range of two percent to 2.25 percent.
The move automatically made its vibrant economy more attractive to investors who hurriedly pulled out their investments from emerging markets like Nigeria to the US.
Unfortunately, the Central Bank of Nigeria was forced to dip its hands into the foreign reserves to provide the fleeing investors with the US dollar to retire their investments/defend the naira and this has led to potential currency fluctuations and depreciation.
Commenting on the foreign reserves crash, the Head of Banking and Finance Department, Nasarawa State University, Prof Uche Uwaleke, said the government must work very hard to increase investor’ confidence, work on the ease of doing business initiatives to attract more investors.
Uwaleke said Nigeria also needs to allay investors fears on election-driven political risk and volatility.
“Again, we need to reduce tension coming from political uncertainty via assurances that the 2019 elections will be free and fair and free from violence of any sort.
“More so, insecurity challenges should be tackled with farmers-herders’ clashes urgently addressed. We need to work on infrastructure and that can be done through implementation of the capital component of the 2018 budget.
“Part of the cause of this drop in foreign reserves is that some politicians spenddollars instead of naira. They must have been partly responsible for the pressure on dollars. The dollars they spent on primaries could not have come from parallel sources alone but official sources”, he said.
However, to avoid depreciation of the naira, the CBN has decided to continuously intervene in the foreign exchange market to keep the naira stable at 360 to 364 to the greenback.
Explaining this in Bali, Indonesia, at the just concluded World Bank and IMF meetings, Godwin Emefiele, the CBN governor said the bank will save the naira rather than build more reserves.
“You can only build reserve buffers if you want to hold on to the reserves while allowing your currency to go and wherever it goes is something else,” Emefiele had said.
“It is a choice we have to make and at this time, the choice for Nigeria is to maintain a stable exchange rate so that businesses can plan and we don’t create problems in the banking system.”
Some other Analysts say that if the rout in the global equity markets persists and Nigeria witnesses another Fed rate hike, then the pressure is expected to increase. Some analysts are forecasting that the CBN will no longer be able to maintain the exchange rate when foreign reserves hit US$34.3bn.
Deceleration or acceleration of this depletion will largely depend on the aforementioned factors. Then, you throw in election-driven political risk and volatility.