Between rising external reserves and frustrating economic challenges

The recent growth of Nigeria’s foreign reserves has come to many as some form of cheery news.

From the records of the Central Bank of Nigeria (CBN), external reserves recorded a 22-month high of $37.31 billion in September 2024 reflecting a significant foreign exchange inflow into the country. In as much as this is a positive development, it is disappointing that this has not helped to stabilise the country’s foreign exchange market, as would be expected. That raises fundamental questions as to where this increase in reserves is going. Are there leakages in the system? Is it that the demand profile for foreign exchange is increasing as soon as supply is growing, or are there issues of political interference in the market? Many are anxious to know.

Since the inception of the Bola Tinubu administration when two major policy pronouncements were made last year, which included the harmonisation of the foreign exchange market, the market has remained unstable to date with the rate growing in leaps and bounds. At the Investors and Exporters official foreign exchange market, the rate had jumped from about N461 to one US dollar (USD) to over N1,500 to one dollar presently. This is also similar to the parallel market where the rate jumped from about N780 to one USD to over N1,650 presently. It has been a case of “yo-yo” or up-and-down phenomenon ever since with devastating effects on the inflation rate and impoverishment of the Nigerian populace. Hardly has any citizen escaped the effect of this negative development in the foreign exchange market. The question is “what are the issues”?

First, in tracing the distortions in the market for foreign exchange, one has to look at the two core issues in price determination, namely the supply and demand forces. As reported on a year-to-date basis, the country’s reserves surged by almost 13% from $33 billion in January 2024 to $37.3 billion in September 2024. Due to the fall in real incomes in the economy, the demand did not grow at the same rate as the supply over this period, except for demands emanating from political officeholders and agents of government. Aside from some demands for school fee payments abroad, foreign healthcare expenses and some limited importation requests, the demand for foreign exchange has not grown drastically. It is thus expected that the supply growth should dampen prices in the market. But this has not been so.

The supply has largely emanated from the recently issued $500 domestic bond which was oversubscribed to $900 billion, largely from Nigerians and others in the Diaspora. Added to this have been loans from multilateral institutions such as Afreximbank, African Development Bank and the World Bank. These have all created holes in the country’s finances because they are all loans to be repaid sooner or later by the country. Invariably, the supply sources are also not stable.

The Central Bank thus has its work cut out for it and it has to put on its thinking cap to arrest this deteriorating state of the foreign exchange market given that it has serious implications for the well-being of the entire economy. In this regard, it is observed that, along these lines, the CBN recently announced the introduction of an Electronic Foreign Exchange Matching System (EFEMS) in December 2024, to enhance governance and transparency and enable a market-driven exchange rate – to automate the foreign exchange market transactions in the quest to curb excessive speculation. The new system, according to the CBN, is expected to “facilitate a market-driven exchange rate accessible to the public”. In the same vein, the CBN has also released new guidelines for players in the foreign exchange market.

While these steps are laudable, the core issues for a reliable foreign exchange supply need to be investigated meticulously. There are a lot of questions begging for answers here. Why is the country not meeting up with its Organisation of Petroleum Exporting Countries (OPEC) quota, hence why does the incidence of oil theft persist? Why are there issues with the Nigerian National Petroleum Company Limited (NNPCL) in making remittances of proceeds from oil sales to the level as expected, to the federation through the CBN? Why are our export proceeds from the agricultural and industrial sectors dwindling? Why has capital importation to the country not grown despite the continuing jerking up of the monetary policy rate by the CBN in many of its monetary policy committee meetings in the past four sessions? Many questions are begging for answers without which the instability in the foreign exchange market will continue unabated despite the new system the CBN is putting in place effective December 2024. The imbroglio between the Dangote Refinery and the NNPCL is also part of the issues that need to be resolved, alongside the repairs of the four NNPCL refineries at Warri, Kaduna and Port Harcourt. Nigerians have suffered a lot in the recent past and the instability of the foreign exchange market and its consequential inflationary effects are at the root of this problem. More work needs to be done, to bring sanity to this all-important foreign exchange market, in the interest of the ordinary Nigerian.