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Declining foreign reserves worsen Nigeria’s debt, revenue crises

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Nigeria may be headed for a bigger debt crisis arising from revenue pressures if the factors driving persistent decline of the nation’s foreign exchange reserves continue to defy solution.

Foreign exchange reserves are a critical indicator of the country’s economic health. It serves as a buffer for the nation in external trade and currency management and ensure global confidence in the country.

The country’s economy is heavily reliant on l oil exports, which account for over 90 percent of its foreign exchange earnings. But Africa’s largest oil producer is losing a fortune on account of oil production shortfall and challenges in the export of the commodity following global economic growth slow-down..

Nigeria’s challenges in lifting its own oil output became more glaring recently when Dangote Refinery disclosed plans to buy millions of barrels of U.S crude over the next year as it ramps up processing rates.

Assurances by the Federal Government and the Nigerian National Petroleum Company Limited (NNPCL) of meeting the country’s Organisation of Petroleum Exporting Countries (OPEC) quota notwithstanding, Nigeria recorded an estimated 30 million barrels underproduction in the first four months of 2024.

Analysis of latest data from the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) indicates that, whereas Nigeria was meant to produce a revised 1.58 million barrels per day during the period, on the average, output was 1.32 million bpd.

In April, the NUPRC data showed that Nigeria recorded a volume of 1.28 million bpd, compared to 1.23 million bpd in March. It further showed production of 1.32 million bpd in February and 1.42 million bpd in January this year.

In all, excluding condensates, which are outside OPEC’s computations, the country managed to drill 44.2 million barrels in January, 38.3 million bpd in February, 38.1 million barrels in March and 38.4 million barrels in April.

The data further showed that, whereas Nigeria was supposed to record an estimated 190 million barrels in the four months spanning January to April, it could only drill 160 million barrels for the period, indicating a 17.1 per cent deficit.

These, experts believe, are conspiring with decrease in foreign investment, and a rise in imports to shrink the foreign reserves with serious negative implications for the economy.

A recent report revealed that foreign direct investment ( FDI) into the country fell by $470 million in the past five years. In Q3 2023, the National Bureau of Statistics (NBS), reported total capital importation into the country at $654.65 million, lower than $1.15 billion recorded in the same period in 2022. This is a decline of 43.55 per cent. In comparison to the preceding quarter, capital importation fell by 36.45 per cent from $1.03 billion in Q2 2023. On a year-on-year basis, there was a substantial 69 per cent decrease.

Besides, Nigeria’s import bill surged by an astonishing 66.8 percent in the fourth quarter of 2023, reaching N14.1 trillion in the last three months of the year, data from the NBS showed. The increase can be attributed to the depreciation of the exchange rate and inflation related to import, which contributed to the elevated cost of importation.

Disturbing trend

According to data from the Central Bank of Nigeria (CBN), Nigeria’s foreign exchange reserves have fallen by $1.8bn in 10 weeks. As at May 29, 2024, the country’s FX reserves stood at $32.69bn, down from $34.44bn as of March 18.

The decline signifies a drop from the $36.1bn recorded in May 2023. The data also showed that the reserves have been declining steadily over the past few months, with a total decrease of $3.4bn since February 2024.

This trend poses a major risk in debt service obligations. Debt repayment recorded by the apex bank as of January 2024 was $560m, it reduced to $283.29m in February and then $276.16m in March 2024. Experts claim that the apex bank must have been servicing the foreign debts with the external reserves.

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Recently, the CBN Governor, Olayemi Cardoso, giving the specific reasons for the significant decline in the foreign exchange reserves asserted that it was not primarily aimed at defending the naira, as commonly believed, but rather to partially repay debts owed to creditors.

Cardoso had said, “What we have seen concerning shift in our reserves is the shift that you would find in any country, where, for example, debts are due and certain payments need to be made and they’re done, because that is also part of keeping your credibility intact and other times money comes in and you know it takes the reserves up again and watches in the next couple of days, there will be an improvement.”

Debt service

Global credit ratings agency, Fitch, in its latest credit outlook for Nigeria, projected that the country’s external debt servicing would rise by $400m to $5.2bn in 2024.

This is coming at a time the International Monetary Fund (IMF), has in its latest country report on Nigeria said the country’s foreign reserves may fall to $24bn in 2024.T

The IMF anticipated a challenging period through 2024–25 for the country’s financial account, exacerbated by an absence of new Eurobond issuances, significant repayments of existing funds and Eurobonds totalling $3.5 billion, and continued portfolio outflows.

The report read in part, “Through 2024–25, the financial account is likely to deteriorate, with no projected issuance of Eurobonds, large Fund and Eurobond repayments of $3.5bn, and portfolio outflows.

“Hence, despite a current account surplus, officially reported reserves are projected to decline to $24bn in 2024 before increasing again to $38 billion in 2028 as portfolio inflows resume.”

Data from the international payment segment of the CBN website revealed that debt service payments increased steadily between January and March and over the past few years. This has seen the Federal Government spend about $1.12bn on foreign debt service payments in the first quarter of 2024

A monthly breakdown of the debt service payments revealing a fluctuating yet consistently high expenditure pattern shows that the government started 2024 with a significant debt servicing obligation of $560.52m in January. This sum alone exceeded the entire debt servicing expenditure of January 2023 ($112.35m) by nearly five times.

Declining foreign reserves worsen Nigeria’s debt, revenue crises

FX Reserves

In February 2024, the debt servicing payments were somewhat moderated but remained substantial at $283.22m. It is lower than January’s massive outflow, and February 2023’s debt servicing of $288.54m.

March 2024 continued the trend but at a lower figure, with Nigeria expending $276.17m on debt servicing. While this represented a slight decrease compared to February and a far lesser decrease from March 2023’s $400.47bn, it was still a notable expenditure, further burdening the country’s fiscal position.

It was further observed that Nigeria spent about 70 per cent of its dollar payments to service external debts between January and March 2024.

According to data from the CBN, out of the $1.61bn in total outflows made during this period, a substantial amount of $1.12bn was directed towards servicing external debt. This figure represents a hefty slice of the nation’s financial resources and indicates a significant increase from the previous year when it was 49 percent in Q1 2023.

An Economist and public affairs analyst, Dr. Amos Okoro, is of the view that the decline in foreign reserves at this time should trigger a more proactive measure in financial resource management, as not so much revenue is expected from the dwindling oil production.

“There is need for us to be very watchful, careful and vigilant at this time, as we are seeing more pressure on the demand for FX coupled with decline in oil production, which may continue for some time”, Okoro said.

“There is need for the government to be more proactive in managing the financial resources, build more investor confidence as well as address the issue of banditry that scare investors.”

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