August 19, 2024/CSL Research
Based on data from the Central Bank of Nigeria (CBN) as of August 15, 2024, the nation’s external reserves showed a slight decline of US$0.34 billion, decreasing to US$36.53 billion from a year high of US$36.87 billion recorded on 7 August 2024. This decline is attributed to the CBN’s sale of US dollars, amounting to US$876.26 million, to 26 authorized dealers during the recent retail Dutch Auction (rDA). The auction, held at an exchange rate of N1,495/US$, was aimed at addressing the growing unmet foreign exchange (FX) demand from end users.
Though other sources like foreign remittances, foreign currency loans, and yields from foreign assets contribute to the external reserves, the major source of inflow is crude oil sales receipt. Oil prices have been high in recent years, influenced by the impact of the Russia-Ukraine, Israel-Gaza crisis on the global energy market.
However, Nigeria has failed to fully benefit from this due to declining production figures caused by crude oil theft and deteriorating oil infrastructure. Additionally, subsidy payments have been high as refined petroleum landing costs surged alongside rising crude prices. The Tinubu administration has introduced several polices to create a more transparent FX market. Despite these measures however, FX pressures persist leading to the continuous depreciation of the Naira.
In an effort to address FX liquidity challenges, increase US dollar inflows, and optimize the use of foreign exchange within the system, the federal government has introduced initial guidelines for the issuance of a US$500 million series 1 domestic bond, set to debut this month. This bond, the first dollar-denominated instrument to be launched locally, has a five-year tenure and offers a medium-term investment opportunity for investors seeking stable returns.
It is benchmarked against the yield of the federal government’s Eurobond. While this may offer a temporary solution, without urgent structural reforms on the fiscal front to enhance FX supply, the country’s reserves could remain pressured in the medium term.
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