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Foreign reserves dip significantly, reverses previous gains

By The Citizen
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Amid myriad of restrictive measures to stem the steady slide in the external sector of the economy, a significant reversal of gains has been recorded in foreign reserve, with latest figures at $27.1 billion as at last weekend, showing a decline by $730 million or about 2.6 per cent in April 2016, against $27.9 billion recorded in March.

The March figure was the first growth, though marginal at about 0.14 per cent, ever recorded in recent months.

The April figure, which is now less than six months import cover, also shows a massive 6.4 per cent decline since this year, losing a total of $1.9 billion.

The latest development came against the backdrop of foreign exchange management measures aimed at reducing demand, curtailing speculative purchases, while reining in on exchange rate volatility at the autonomous segment of the market.

Vanguard investigations show that while the first two objectives have largely failed so far since last year, when the policies came into force, a measure of stability in exchange rate had been achieved after the February 2016 all-time volatility was recorded.

Almost throughout April, near-stability in exchange rate had been recorded in the parallel market which ranged between N320 and N330/ USD1, while the official and interbank market segment was maintained administratively at N197 and N199/USD1.

As at last weekend, rates were stable at market average of N321/USD1, even as a marginal appreciation of the local currency was recorded early in the week.

However, the Central Bank of Nigeria, CBN's, policies have not been able to address the wide parallel market gap which had spurred excessive and speculative demands in the official segment.

In the same month of April, two major policy moves were made to starve off the demand pressures but the latest reserves position indicates that the policies are yet to yield positive results.

The two new policy moves are the currency swaps with China and the special provision and sale of foreign exchange to petroleum products marketers.

China and petroleum products import bills are the largest group of real demands on foreign exchange reserves.

Before the two policies, CBN had last year eliminated over 41 products from its list of eligible products for foreign exchange supply, while following it up with stringent foreign exchange bidding requirements on banks.

Policy outcomes were adverse
These policies, along with several monetary policy circulars and directives on foreign exchange since last year, according to some observers, may have slowed down the rate of decline in foreign reserves, but they may have equally had adverse effect on the general macroeconomic indicators.

For instance, the economy had recorded massive foreign investment exits, especially foreign portfolio investments, FPIs.

The figures on the Nigerian Stock Exchange Domestic & Foreign Portfolio report released in March showed that FPI outflows at cumulative value of N58.2 billion in January and February surpassed inflows which was N27.95 billion by 108.2 per cent.

The foreign exchange policies have also pressured inflation to 12.8 per cent, far beyond CBN' s tolerance limit of 9.6 per cent while depressing gross domestic products, GDP.

The cumulative effect on the private sector includes poor corporate performance with banking sector taking the worst heat ever recorded in recent years.

Future appears hopeful
Looking into the month of May, financial analysts at Afrinvest West Africa, a Lagos-based financial institution, said: 'We expect that the relative calm in the foreign exchange market will spill over into the month of May. However, we believe that there might be a shift in the stance of the apex bank on foreign exchange policies at the next Monetary Policy Committee, MPC, meeting scheduled for the May 23 and 24.

MPC is the highest monetary policy making organ of the CBN.

In their own introspection, analysts at Cowry Assets Management, another Lagos-based investment house, said 'this week, we anticipate further stability in exchange rates amid relatively higher global crude oil prices.'

Nigeria's external sector declines have been directly linked to the crash in oil price, the main source of foreign exchange supply to the economy.

But last month, oil price began a significant rebound hitting a one year high of USD46.1, though industry experts do not see the uptick sustained.

However, it appears the foreign exchange market is already reflecting a positive sentiment from this development in the oil price as the interbank forwards market indicated appreciation of the local currency for virtually all tenors.

At spot rate, one month, two months and three months tenors appreciated week-on-week by 0.06%, 0.24%, 0.48% and 0.24% to N197.43/USD, N200.44/USD, N201.47/USD and N203.38/USD respectively, last weekend. Vanguard.