External reserves fall by $3bn in four weeks.

The Naira and dollar

The external reserves have started dropping at a faster pace due to low demand for the nation’s crude oil and its falling prices globally.

Nigeria derives 70 per cent of its revenue and 90 per cent of its foreign exchange from crude oil.

According to the latest statistics from the Central Bank of Nigeria’s website, external reserves lost a cumulative amount of $3bn in the last four weeks. Specifically, the foreign reserves tumbled from $33.8bn on February 5 to 30.8bn on March 5.

This indicates a 9.7 per cent fall month-on-month.

The central bank has been using the reserves to support the ailing naira, which has been hammered by the falling global oil prices and uncertainty over the delayed presidential elections now fixed for March 28.

Economic and financial analysts linked the huge drop in the stock of external reserves to political spending, falling oil prices which have put pressure on the local currency, and speculative demand for the dollar by foreign exchange dealers.

Analyst and Head, Investment and Research, Afrinvest West Africa Limited, an investment advisory firm, Mr. Ebo Ayodeji, said, “The recent huge drop in the reserves is as a result of the continuous demand for the greenback. This has been fuelled by political spending and the recent round tripping carried out by foreign exchange dealers before the closure of the Retail Dutch Auction System forex market by the CBN; there was huge artificial demand for the dollar during the period.”

Ebo, however, expects the rate at which the stock of external reserves is being depleted by the central bank to reduce in coming weeks as the gap between the dollar rate at the interbank and parallel markets reduces.

“As time goes on, the gap between the interbank and parallel market will not be significant enough to create artificial demand,” he added.

Analysts at BGL Plc had in January said the country’s external reserves might drop below $30bn by the end of the second quarter of this year if the oil price fell below $65 per barrel.

On Monday, the Brent crude oil price closed at $59.88 per barrel.

The BGL analysts, in their economic report detailing the outlook for 2015, had stated that the unfolding oil price scenario and the consequent exchange rate depreciation would further put pressure on the external reserves over the next few months.

“The reserves are just a cushion. The cushion only increases when you have surpluses. We don’t have those surpluses right now. We are dealing with just making do with what we have. So we shouldn’t be talking about reserves now. We should be talking about how to reduce that which we are spending,” renowned economist and Chief Executive Officer, Financial Derivatives Limited, a local research firm, Mr. Bismarck Rewane, had said about three weeks ago.

Last month, the foreign reserves fell by 8.3 per cent month-on-month. The reserves dropped from $34.4bn on January 23 to $31.5bn on February 25.

On February 23, the reserves had fallen by $2.68bn in less than two months. This was an eight per cent drop from the balance of $34.47bn recorded on December 31, 2014.

punch.