Data from the Central Bank of Nigeria (CBN) shows that Nigeria’s gross external reserves increased marginally by $64million to $39.2 billion in July 2022.
The rise is the second in a row and follows a more substantial increase of $672million in June.
The CBN does not provide a timely explanation on the drivers of the external reserves, but in the face of dwindling foreign exchange (FX) inflow from crude oil due to the oil sector’s low productivity, flight to quality by portfolio investors away from emerging markets, and non-issuance of external debt, analysts from FBNQuest believe that the likely sources of the increase are non-oil exports and diaspora remittances.
According to the analysts, total reserves as of end-July covered 9.1 months of merchandise imports based on the balance of payments for the 12 months to March 2022, and 7.1 months when we add services.
“We consider this a healthy buffer. However, for a more accurate picture, we must adjust the gross reserve figure (and the import cover) for the pipeline of delayed external payments, which is estimated at $1.7 billion by the World Bank,” the analysts stated.
Other factors, according to FBNQuest, include the impact of shocks to the external environment, brought on by the Russian-Ukraine conflict, which led to a higher import bill (due to rising commodity prices), the large-scale exit of portfolio investors, and a decline in fx inflow from the tourism sector, of which Russian and Ukraine tourists made up a sizable portion.
By way of comparison, it noted that Egypt’s $33.1 billion worth of FX reserves as of end-June, were sufficient to cover five months of merchandise imports, much less than the 9.1 months covered for Nigeria.
There is, however, a case to be made that if the CBN’s demand management measures had not repressed FX demand, Nigeria’s FX reserves (and import cover) may have been much lower the firm’s analysts stated.
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