Economy
Dwindling foreign exchange reserves signal hard times ahead
By Okey Onyenweaku |
Fear has gripped the Central Bank of Nigeria (CBN) and other economic managers in the country as the worsening world economy is beginning to having a toll on the country’s external reserves.
External reserves are of paramount importance to every nation because of the buffer they offer and Nigeria is not an exception.
Foreign exchange reserves are assets held on reserve by a central bank in foreign currencies. These reserves are used to back liabilities and influence monetary policy. It includes any foreign money held by a central bank, such as the U.S. Federal Reserve Bank.
What the experts say Countries use foreign currency reserves to keep a fixed rate value, maintain competitively priced exports, remain liquid in case of crisis, and provide confidence for investors. They also need reserves to pay external debts, afford capital to fund sectors of the economy, and profit from diversified portfolios.
CBN’ s records show that Nigeria’s foreign exchange reserves had risen to an unprecedented level in a previous era, moving from USD 4.98 billion in May 1999 to USD 59.37 billion as at March 28, 2007. This boosted the country’s ego and confidence.
But that stability and confidence that Nigeria enjoyed when her external reserves were huge and plum is beginning to wane.
Sending an alarm on this scenario on Wednesday 7, 2020, the CBN sounded a note of worry that the nation’s external reserves was depleting and sliding into a dangerous zone.
Given the pressures on the external sector of the economy, the Central Bank of Nigeria (CBN) has projected a major fall in the country’s foreign reserves to $29.9 billion by the end of 2020, citing decline in oil prices and the impact of the Coronavirus (COVID-19) pandemic.
In a report titled, ‘Monetary, Credit, Foreign Trade and Exchange Policy Guidelines for Fiscal Years 2020/2021,’ the apex bank stated:
“Sequel to the COVID-19 pandemic, the viability of the external sector in 2020 is expected to deteriorate, given the present worsening current account balance and depletion of external reserves driven, largely, by decelerating export receipts, particularly oil.”
“Specifically, the degree of external reserves accumulation is expected to decelerate, as outflows are expected to outweigh inflows. “As a result, external reserves are expected to lie between $29.9 billion and $34.3 billion at end-December 2020 (predicated on current declining oil price between $20 and $40).”
However, the apex bank has reported a marginal increase in the reserves recording $59 million growth to $35.7 billion from $35.7billion as at August 29, 2020. Prior to September, the reserves rose by $65 million from $35.59 billion as of August 20 to $35.66 billion as of August 27.
In an article by Steve Goldstein and published in The Wall street Journal on May 20, 2020 and titled “Pandemic could cost global economy $82 trillion in depression scenario”, it was estimated that the pandemic Covid-19 could cost the world over $80trillion.
‘’How badly will the coronavirus pandemic impact the economy? Does $82 trillion sound not good? That is the scary number put out by the Centre for Risk Studies at the University of Cambridge’s Judge Business School.
‘’That figure, of course, needs to be put into context. That’s over five years, not one, and represents the potential hit to the global economy and not just the U.S. in what’s called the “economic depression” scenario.
‘’The GDP for the world’s 19 leading economies was $69.2 trillion last year.
‘’Its “optimistic” take is a loss of $3.3 trillion over five years. It says the consensus expectation calls for $26.8 trillion, or 5.3% of five-year GDP, to be lost.
For the U.S., the potential five-year loss ranges from $550 billion to $19.9 trillion.
‘’It’s safe to say financial markets are not pricing in a global depression. The S&P 500 SPX, +0.80% has climbed over 30% from the lows of March.
If the numbers sound too outlandish, consider that growth and returns on assets can be depressed up to 40 years after the pandemic has passed, according to Keith Wade, chief economist at U.K. fund manager Schroders.
“So we might see people want to keep a bigger buffer going forward, as they might be concerned about both job prospects and their incomes,” he said, with concerns about future medical expenses and taxes also potentially impacting consumers.’’, said Paul Hollingsworth, head of U.K. economics at BNP Paribas.
Analysts believe that foreign exchange reserves are important indicators of ability to repay foreign debt and for currency defense, and are used to determine credit ratings of nations. The added that anything otherwise will have grave consequences for the nation.
In fact, any country that lacks the above is really in trouble.
For the Managing Director of BIC Consultancy Limited, Boniface Chizea, the drop in Nigeria’s foreign exchange reserves would decrease the confidence of the people doing business with the country while risk will increase. He explained that the cost of doing borrowing foreign loans for Nigeria would increase.
‘’The oil market is not doing well. That is part of what is affecting the reserves. During the pandemic, there were shutdowns everywhere and there was not much in terms of trade. Countries were more interested in preventing the high number of deaths. So our reserves are bound to come down,’’ he said.
Unfortunately, the price of crude oil which accounts for about 70 per cent of the country’s revenue has not gone beyond $40 to $48 per barrel in recent times, plaguing the country’s economic which is already at -6.1 negative and sliding into recession in the quarter.
And it is more worrisome when the country’s total debt stock is already standing at N31 trillion and rising.
Very clearly, the country needs all the help it can find.
