Nigeria's Gross External Reserves: An Historical Perspective - PFI CAPITAL

AUGUST 03, 2020

The major objectives of external reserve management in Nigeria are ensuring the preservation of Capital, providing adequate liquidity to meet unforeseen needs and ensure that the reserves are readily available to finance day-to-day official transactions, as well as earning returns within the set tolerable risk limits.


Our data is based on the CBN statistics and we start from April 3rd 2006 when the gross external reserve was $36.2 billion and rose to $43.90 billion as at December 19 (the highest for the year 2006). This represents 21.27% increase in external reserve during the 8 months period. We note that during this period, real GDP growth was 6.73% as the real GDP grew from N37.47 trillion in 2005 to N39.99 trillion in 2006. Inflation during this period was also within 1-digit as it averaged 8.38% in 2006.  On a MoM basis, Nigeria recorded negative inflation rate in June (-0.2%), October (-2.5%), November (-0.7%) and December (-0.8%). This shows the growth was stable as inflation was at the desired level and there was relatively increased domestic production of goods and services. It was also during this period that Nigeria successfully met the condition of debt relief from the Paris Club, which had its debt settled with the group.


By 2007, the gross external reserve grew from $41.90 billion as at January 4, to $52.47 billion as at December 13, representing a growth rate of 25.27% during the period or an addition of $10.57 billion to the gross external reserve during the period. Average inflation rate in 2007 was 5.42% which is the lowest inflation rate Nigeria recorded during the years under review. The inflation rate declined by 140bps from 8% in January 2007 to 6.6% YoY in December 2007. Inflation rate on MoM basis was also low and we highlight that there was deflation in January, October and November MoM in 2007. The country also enjoyed increased real GDP growth during this period at 7.32%.


In 2008, Nigeria recorded highest gross external reserve during the years under review with external reserve hitting the highest point of $64.73 billion on August 11th, 2008. This was a period of boom as the equities market also rallied while hitting an all-time high of 64,834.33 points in March 2008 (before dropping to 20,436.40 points in April 2009 as the global financial crisis hit the market). By December 30th, 2008, external reserve already dropped to $52.60 billion which represents -18.74% decline from its all-time high of $64.73 billion in August 2008. Average import cover during the year was 16.7 months. We are also able to note that headline inflation grew faster as it averaged 11.52% while real GDP growth grew at a slower rate of 7.2%. The financial crisis majorly had effect on Nigeria's financial and trade sectors as it manifested majorly from liquidity and credit crunch as well as significant reduction in confidence in the banking system. Hence, impressive performance of the non-oil sector during the period, supported Nigeria's growth throughout the crisis.

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Source: CBN, PFI Capital Research


In 2009 and 2010, gross external reserve ended the year at $42.38 billion and $32.34 billion respectively. This shows that gross external reserve declined significantly by 19.43% in 2009 when compared to the December 30th, 2008 value of $52.60 billion. It also shows that the reserve declined by -23.69% in 2010 when compared to the 2009 ending value of $42.38 billion. These were the periods the financial crisis hits the peak on the economy as average inflation rate also grew fast to 12.59% in 2009 and 13.77% in 2010. Average official exchange rate also grew during the period as it was N150.30/$ in 2010 compared to N148.88/$ in 2009 and N118.57/$ in 2008. In essence, the average official exchange rate depreciated by 25.57% in 2009 and by 0.95% in 2010. We note that the average official exchange rate appreciated in 2007 (2.19%) and 2008 (5.77%).


By 2011, the external reserve grew marginally by 0.93% to $32.64 billion as at December 2011 from $32.34 billion recorded in December 2010. Highest gross external reserve in 2011 was recorded on 4th March as the reserve hit a high of $36.49 billion. By the end of 2012, gross external reserve grew to $43.83 billion as inflation rate averaged 12.24% during the period while the economy grew at a slower pace of 4.21% in real terms. Oil price averaged $105.87/barrel in 2013, compared to an average of $109.45/barrel. This reflected in the external reserve which closed the year at $43.61 billion compared to $44.34 billion at the start of the year, representing a marginal decline of -1.65%. The economy however grew at a faster rate of 5.49% compared to 4.21% recorded in 2012 and the average exchange rate appreciated by 0.12% to N157.31/$.


For 2014 and 2015, the price of oil averaged $96.29/barrel and $49.49/barrel respectively. External reserve fell to $34.21 billion in December 2014 compared to $42.85 billion in December 2013, stemming from relative reduction in price of crude oil as well as oil vandalism activities in the Niger-Delta region. It was at this point that the recession bell rang. By 2015, the price of oil declined significantly by -48.60% to an average of $49.49/barrel while the gross external reserve also declined accordingly by -17.41% to $28.28 billion in December 2015 compared to $34.21 billion recorded in December 2014. Average inflation rate grew faster (9%) in 2015 compared to 8.05% in 2014 while the real GDP growth rate in 2015 slowed to 2.79% compared to 6.22% recorded in 2014.


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Source: CBN, PFI Capital Research


The Nigerian economy entered into economic recession in 2016 (first since 1991) as the real GDP growth for the year printed at -1.58% stemming majorly from the slump in the price of crude oil, while average inflation rate was 15.62% and average official exchange rated printed at N253.49/$ during the period. External reserve hit the lowest level of $23.897 billion on October 19th, 2016. At the end of the year, the external reserve closed at $26.99 billion which was the lowest since 2005. During this period, the CBN restricted foreign exchange on the importation of 41 items including toothpick. By April 2017, the CBN introduced the SMIS window to deepen the foreign exchange market and accommodate all FX obligations for importers and investors. Hence, the beginning of multiple exchange rate windows- CBN official, SMIS and I&E window. At the end of 2017, the country was back to positive growth rate as real GDP grew marginally by 0.82%. Average inflation rate however was higher (16.55%) when compared to the average rate in 2017 (15.62%). The exchange rate also depreciated by 20.63% to N305.79/$ while the gross external reserve printed at $38.77 billion by 29th December 2017 at an average import cover of 12 months.


Modest growth rate continued to 2018 when the Nigerian economy recorded real GDP growth rate of 1.91% in FY'18. During the same period, average inflation rate slowed down to 12.15% while the average official exchange rate slightly depreciated by 0.09% to N306.08/$ from the average official rate of N305.79/$ in 2017. The gross external reserve grew from $38.91 billion on 2nd January, 2018, to $43.12 as at December 2018 with the average import cover for the year printing at 13.8 months, on the back of increased oil production and oil prices relative to the 2016 levels.

In 2019, the Nigerian economy grew by 2.27% in real terms, consolidating the fragile growth rates since the country was out of recession in 2017. Average headline inflation rate also grew at a slower rate, printing at 11.39% while the average official exchange rate depreciated marginally by 27bps to N306.92/$ compared to N306.08/$ in 2018. The external reserve which was at $43.08 billion at the beginning of the year, ending the year lower at $38.62 billion. This showed that the external reserve shed $4.46 billion in 2019. Banking on optimism in external sector activities coupled with the US-China trade deal, as well as high oil prices, the economy was set for continued growth increases in 2020 until the COVID-19 pandemic hit the world which led to oil prices falling. This was aggravated by the oil price war between Russia and Saudi Arabia which sent oil prices to 18 years low, which had negative impact on the external reserve of the country which fell to $33.44 billion as at 29th April. By 13th July, the gross external reserve accreted by $2.69 billion (from the April 29 level) to $36.13 billion on the back on the inflow from the IMF while the CBN keep having little activities in the forex window.


Our model shows that both inflation rate and exchange rates have negative relationship with the growth rate and these two variables are significant variables that are influenced by the level of external reserve, which is in turned influenced by the fluctuation in the international oil price. We project inflation rate to average 12.84% in 2020, while oil price is expected to average $42/barrel in 2020 and the official exchange rate to end the year at N381/$. As such, we expect the real GDP for the year to print at -3.92% in FY'20.


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