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NIGERIA’s external reserves fell to $39.9 billion last week, the lowest in 22 months. This development compounds the policy dilemma that will confront members of the Monetary Policy Committee, MPC, of the Central Bank of Nigeria, CBN, as they tackle the challenges of inflationary pressures in their meeting holding in Abuja today and tomorrow.

Data from the CBN shows that the latest figure is the lowest since December 2017.

The reserves had been on the downward trend since July 5, 2019 due to a combination of three factors, namely, low crude oil price, foreign portfolio investors, FPIs, exiting the nation’s fixed income market, and increased dollar sales by the CBN in order to meet dollar demand by the exiting FPIs while maintaining exchange rate stability.

As a result, the reserves fell by $5.1 billion or 11 percent, to $39.969 on Thursday November 21, from $45.069 billion on Friday, July 5. This is in sharp contrast to the performance in the first half of the year (H1’19), when the external reserves rose by 4.5 percent to $45.069 billion as at June 30 from $43.116 billion as at December 31, 2019.

Analysts, however, opined that the downward trend in the external reserves will persist through the first half of 2020 (H1’2020), though at a moderate pace. “We do not yet see an end to the declining trend in the external reserves”, said, Victor Ofili, an analyst with Cowry Asset Management Limited. “In fact, we could see sustained decline in external reserves if we consider factors which influence inflows and outflows of dollars to and from the economy.

This is also compounded by decline in interest rates which so far yields negative real returns on investments. This could be reversed if interest rates rise in order to boost the supply of foreign portfolio inflows (supply side). So we believe this trend could continue up until H1 2020 unless we see more external revenue sources.” On his part, Wale Olusi, Head of Research at United Capital Limited, also projected that the decline in external reserves will persist.

He, however, noted that recent policy measures by the CBN will help moderate the pace of decline and keep the reserves above $35 billion in 2020, which can support over eight months of imports. He stated: “We think pressure on the external reserves will persist so long as the CBN maintains its resolve to keep the naira relatively stable via periodic intervention in the currency market.

Notably, the sharp drop in the size of the dollar reserves observed since July 2019 is linked to downward pressure on oil prices and slower inflow of foreign portfolio investment. Looking forward, the argument for a reversal of this trend is weak. Hence, pressure on the external reserves may persist. “Give or take, we expect the stock of Nigeria’s external reserves to stay buoyant in 2020 given the CBN unorthodox monetary policy stance which creates a window for Open Market Operations, OMO, sales to FPIs at a more attractive rate compared to local debt market.

While the trajectory of the dollar reserves may continue southwards, the net impact of the CBN’s stance as well as oil proceed should keep the reserves well above $35 billion, which can support over eight months of import, by year end.”

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