Nigeria’s external reserves have recently reached their lowest level in two years, dropping to $33.9 billion as of July 19th, 2023. This decline comes despite the introduction of the revised I&E Window on July 14th, 2023. The external reserve was at $35 billion when the current president, Tinubu, took office and fell to $34.6 billion on July 13th, just before the changes to the forex policy.
Several factors have contributed to this drop in external reserves. One of the main reasons is the reduced foreign exchange earnings due to lower crude oil revenues. Nigeria attributes the decrease in oil revenues to crude oil theft. Additionally, a lack of foreign investor inflow, caused by lower interest rates, has been detrimental to the government’s efforts to reverse the trend.
Calls for a unified exchange rate have been addressed, but foreign investors remain concerned about the country’s growing debt and fiscal crisis, contributing to their hesitancy to invest.
The exchange rate between the naira and the US dollar closed at N768.16 per dollar at the official Investor and Exporters window on July 20th, 2023. During intraday trading, the rate reached a high of N844/$1 and a low of N700/$1. Furthermore, the naira significantly weakened against the US dollar in the parallel market, closing at N860/$1.
The decline in external reserves has significant implications for the stability of Nigeria’s currency, the naira. With lower reserves, the currency may face increased pressure and potential depreciation. A weaker currency can have adverse effects on various sectors, including imports, inflation, and investor confidence. Nigeria heavily relies on imports for critical sectors like energy, machinery, and consumer goods, making adequate external reserves crucial for ensuring a steady supply of foreign exchange to meet import demands.
However, the declining reserves signal a potential scarcity of foreign exchange, which can lead to challenges in accessing essential imports and hinder economic activities. To ensure stability and support the value of the naira, efforts must be made to address the factors causing the decline in external reserves and attract foreign investment to boost forex earnings.
