Nigeria’s external reserves have slipped by 1.16% over the past two weeks, falling to $36.44 billion as of August 22, 2024, according to data from the Central Bank of Nigeria (CBN). This decline follows the reintroduction of the Retail Dutch Auction System (rDAS) by the CBN in a bid to manage the foreign exchange (FX) market.
The CBN’s renewed strategy saw the sale of $1.7 billion in two separate Dutch auctions to retail end-users via deposit money banks. These interventions aim to alleviate the mounting pressure on the FX market and ensure more accurate price discovery. However, this move has coincided with a gradual depletion of the nation’s foreign currency reserves, which stood at $36.86 billion on August 6, 2024.
Ayokunle Olubunmi, Head of Financial Institutions Ratings at Agusto Consulting, attributes the dip in reserves to a surge in FX demand, typical of the July-September period. “This is a time when the demand for FX is high due to various seasonal factors like school fees payments, summer travel, and businesses stocking up,” Olubunmi noted.
He also highlighted that while CBN’s interventions play a role, other obligations also impact the reserves. “External reserves are like a bank account; money will go out, and come back in. The decline is not solely due to the recent auctions,” Olubunmi explained, suggesting that the reserves might rebound with the successful issuance of the federal government’s $500 million dollar bond.
Muda Yusuf, CEO of the Promotion of Private Enterprise, echoed similar sentiments, emphasizing that the reserves’ levels are primarily driven by inflows. “The reserves are influenced by inflows from sources like the Nigerian National Petroleum Corporation (NNPC), remittances, portfolio investments, and foreign loans,” Yusuf explained.
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Yusuf also raised concerns about potential drops in inflows, particularly from the NNPC, which could be due to factors like forward crude sales and upfront borrowing. “If inflows drop and CBN interventions increase, the reserves could continue to decline,” Yusuf warned, though he reassured that the current dip isn’t cause for alarm.
The proposed $500 million dollar bond by the federal government is seen as a potential lifeline for Nigeria’s external reserves. Yusuf believes the bond could attract significant interest, especially from Nigerians in the diaspora, given the competitive returns compared to other global investment options. “The dollar bond offers a credible investment platform for those looking to invest in Nigeria’s economy, particularly for Nigerians abroad,” Yusuf said.
While the reserves have dipped, experts remain optimistic about the future. The balance between CBN’s FX interventions and the inflow of foreign currency will be crucial in stabilizing the reserves in the coming months.
