Business a.m.

Oil price rises, but external reserves closed June in free fall to $33.3bn

● Analysts expect the reserves to strengthen in Q3 on OPEC+ recommenda­tions

- Charles Abuede

WITH THE RE TURN OF ECO NOMIC activities across the globe and OPEC+ compliance with the Declaratio­n of Cooperatio­n (DOC), there have been positive yields supported by prices in the crude market. Regardless, Nigeria’s external reserves have continued to leak with a $905.5 million dip to $33.3 billion in the month of June, latest data from the CBN show.

According to the CBN data on reserves movement, it fell to $33.32 billion on June 30, from $34.23 billion on May 31. However, the figure stood at $34.88 billion at the end of April 2021. So far, in the first six months of 2021, oil prices have averaged $75 per barrel, well above the 2021 budget benchmark of $40 per barrel. Thus, implying an inflow into the excess crude account. Neverthele­ss, it is worthy to note, as analysts had projected that the external reserves is expected to strengthen in the second and third quarters of 2021 respective­ly as the demand for oil will see an upsurge, little hopes can still be kept alive that improved dollar inflows will begin to trickle into the reserves.

At the last Monetary Policy Committee meeting, Godwin Emefiele, the CBN Governor, while speaking on the decline in external reserves, said it was a reflection of sales to the foreign exchange market and third-party payments. “As a consequenc­e of the lower foreign exchange receipts, the official external reserves declined,” he stated. Although, experts have noted that the rally in the crude oil market had not filtered into the country’s external reserves as the market is a futures market.

As business a.m. noted in an earlier report, analysts at United Capital Research have asserted that the attempt of the federal government to borrow from the internatio­nal debt market and sustained positive momentum of oil prices in the market could further strengthen Nigeria’s gross reserves in the third quarter of 2021. They maintained that the apex bank is likely to stay reluctant in its significan­t forex market interventi­ons pending the period the external reserves cross the $40 billion mark.

“Going forward, we expect the impact of higher crude prices to continue over the coming months. In addition, we expect this to be further aided by the federal government’s plan to issue Eurobonds as part of its debt programme for 2021. We recall that as part of the 2021 budget, the FG announced plans to borrow N2.1 trillion (estimated at $5.5 billion using the N379 exchange rate) from the internatio­nal debt market. While we do not anticipate Eurobond issuance of this magnitude, we expect the FG to attempt raising a similar $3.3 billion it planned to raise last year while funding the rest via multilater­al sources. In our opinion, it could further strengthen gross reserves in the third quarter of 2021.

“Lastly, we think this bodes well for the FX market, thus improving FX liquidity conditions. That said, we believe the CBN will remain reluctant in resuming significan­t interventi­ons in the FX market until the external reserves cross the $40 billion mark,” United Capital analysts concluded.

A report by Statista shows crude oil price has appreciate­d significan­tly since the start of the year, rising from $49 per barrel in December 2020 to as high as $75.6 per barrel in June. However, Nigeria has equally received the hard currencies via other means such as non-oil exports, capital importatio­n, foreign investment flows, service income, diaspora remittance­s, and other invisible items such as external borrowings and foreign aids.

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