Nigeria’s foreign exchange reserves have dipped by $34.58 billion, a 10.25 per cent decline year-to-date. The reserves stood at $38.53 billion on January 2 and have been drawn down by $3.95 billion in the last three months.
There are new fears of further devaluation of the naira due to dip in foreign exchange earnings and reserves as crude oil prices continue to decline.
The naira has tumbled to its weakest level in five years in the parallel market at N415 to a dollar, widening the gap with an official rate of N360 to a dollar. The naira has continued to come under pressure despite COVID-19 lockdown that slowed economic activities and reduced import demand for the dollar.
Given Nigeria’s reliance on crude oil for 90 per cent of foreign exchange revenue, the stability of the naira depends largely on crude oil prices, which have disappointed in recent months. The extended drop in oil prices is increasing pressure on the naira, with continuation around the $25 a barrel levels posing a risk of further devaluation.
Afrinvest Securities Head of Research Abiodun Keripe said a second level naira adjustment was inevitabl.
He said: “Agreeably, there is relatively slow down on economic activities, which have moderated pressure on the naira. As activities return to normal after the COVID-19 lockdown, and businesses begin to demand more dollars to cover import needs, there will be renewed pressure on the naira, and a second level adjustment will occur.”
Keripe said whatever gain would be made through the OPEC‘s decision to cut oil production will have little or no effect on the state of the reserves and Nigeria’s dollar earnings, making further devaluation of the naira inevitable.
In a report titled: ‘Low Oil Pressures Naira’, Trading Desk Manager, at AZA (a non-bank currency broker), Murega Mungai, said: “The naira tumbled to its weakest level in five years in the parallel market at 415 per dollar, widening the gap with an official rate of 380. Given Nigeria’s reliance on crude for 90 per cent of foreign exchange revenue, all eyes are on the oil markets. The extended drop in oil prices today will increase pressure on the naira, with continuation around the $25 a barrel levels posing a risk of further devaluation.”
Nigeria on Sunday joined its other Organisation of Petroleum Exporting Countries (OPEC)+ counterparts to bring into effect the agreement to cut 9.7 million barrels of supply.
Minister of State for Petroleum Resources Chief Timipre Sylva, in a statement, said the development followed the alignment of Mexico.
He added that the “ intervention of the United States of America resulted in Mexico agreeing to a cut of 100 KBOPD and to be complemented by an additional 300 KBOPD by US Producers.”
Syva said this would enable the rebalancing of the oil markets and the expected rebound of prices by $15 per barrel in the short term.
He added: “As agreed, Nigeria will join OPEC+ to cut supply by 9.7 Million Barrels per day between May and June 2020, Eight (8) Million Barrels per day between July and December 2020 and Six (6) Million barrels per day from January 2021 to April 2022, respectively.
“Based on reference production of Nigeria of October 2018 of 1.829 Million Barrels per day of dry crude oil, Nigeria will now be producing 1.412 Million Barrels per day, 1.495 Million Barrels per day and 1.579 Million Barrels per day respectively for the corresponding periods in the agreement. This is in addition to condensate production of between 360-460 KBOPD of which are exempt from OPEC curtailment.”