In a concerning forecast by the International Monetary Fund (IMF), Nigeria’s foreign reserves are expected to undergo a significant reduction, plummeting to $24 billion in the year 2024. This prediction, outlined in the IMF’s latest country report for Nigeria, indicates potential challenges ahead for Africa’s largest economy.
As of February 8, 2024, data from the Central Bank of Nigeria (CBN) positioned the country’s foreign reserves at $33.12 billion, foreshadowing a substantial drop according to the international financial institution’s projections.
The IMF highlighted that despite a surplus in the current account during the first half of 2023, there was a notable decline in reserves. This downturn has been attributed to various factors, including a decrease in hydrocarbon exports primarily due to widespread theft and insufficient investment in crucial upstream infrastructure.
Additionally, profit repatriation from the oil sector has experienced a decline, although it has slightly offset the adverse effects on the current account.
The forecast anticipates a challenging period for Nigeria’s financial account throughout 2024–25, exacerbated by factors such as the absence of new Eurobond issuances, significant repayments of existing funds and Eurobonds totaling $3.5 billion, and continued portfolio outflows.
The IMF projects that despite a current account surplus, officially reported reserves will dwindle to $24 billion in 2024, with a hopeful recovery to $38 billion by 2028 as portfolio inflows are expected to resume.
According to the IMF, the CBN reported that the 30-day average of gross international reserves (GIR) had declined to $33 billion by October 2023, marking a decrease of nearly $4 billion from the end of 2022. However, when considering the IMF’s definition of GIR, which excludes $8 billion in securities as pledged collateral and not readily accessible, the GIR adjusts to a lower figure of $25 billion by October 2023.
Furthermore, the IMF emphasized the importance of comprehensive information on short-term foreign exchange liabilities to accurately calculate net international reserves.
The IMF’s projections underscore the necessity for adept management of Nigeria’s external financial obligations to secure and expand foreign reserves amid challenging economic circumstances.
Nigeria is grappling with significant challenges related to foreign exchange illiquidity, hindering the country’s ability to address its forex backlog and further depreciating the value of the Nigerian currency. This forex scarcity has impeded meeting the nation’s foreign exchange obligations, contributing to dwindling confidence among foreign investors.
The struggle to attract foreign investment has intensified, with Nigeria experiencing a notable decline in foreign capital inflow. Recent data indicates that the country attracted only $654.65 million in foreign capital during the third quarter of 2023, with Foreign Direct Investment (FDI) constituting a mere 0.091% of total capital imports in this period.
To address these challenges, the Central Bank of Nigeria (CBN) has undertaken measures to tackle the backlog of foreign exchange forwards, with an outstanding balance of $2.2 billion yet to be cleared.
In a positive development, CBN Governor Yemi Cardoso recently announced an infusion of over $1 billion in liquidity into the foreign exchange market, attributing this boost to recent reforms by the apex bank. This surge in FX market liquidity signals a significant shift and offers hope for gradual improvement in the forex landscape as foreign portfolio investors express interest in the country.
The ongoing reforms in both the forex market and the oil sector are crucial for enhancing Nigeria’s attractiveness to foreign investors and bolstering the inflow of foreign capital. These reforms are vital for strengthening the country’s foreign reserves, essential for stabilizing the Nigerian economy and ensuring its growth trajectory.