Business
Nigeria’s ‘rented foreign reserves’ increase risk perception
ABUJA – The continued reduction in the accretion to Nigeria’s foreign reserves, currently at $41.5 billion, and foreign portfolio investments (FPI) accounting for about $20 billion of this amount raises the risk perception about Nigeria’s economy, BusinessDay interaction with economy watchers has revealed.
“The over $20.0 billion of the total foreign reserves being inflow from FPIs calls for concern, in view of the gradual phase-out of the US Fed stimulus programme in 2014,” say Afrinvest analysts. “Based on this development, it becomes imminent that the ‘rented reserves’ may depart the country sooner than we anticipate.”
Consequently, any portfolio reversal as a result of the United States quantitative easing will leave the country with no option than to borrow, with the resultant effect of higher yields on the Federal Government bonds and, consequently, increase in the level of recurrent expenditure.
For instance, government interest on domestic debt has been on the increase, from N495.1 billion in 2011 to N559.5 billion in 2012, to N591.8 billion in 2013 with N712 billion projected for 2014, in addition to the N300 billion CBN interest on T-Bills and Open Market Operations (OMO).
Some other analysts argue that the sustenance of foreign reserves on portfolio investments or ‘hot money’ portends more vulnerability of the economy to the whims and caprices of investors who may take advantage of the opportunities provided by the easing in the US market to embark on reversals.
Doyin Salami, a member of the Monetary Policy Committee (MPC) of the CBN, said at a recent meeting of the committee that he sees the deterioration in foreign reserve position as a reflection of a slowdown in inflows from foreign portfolio investors (FPI), adding that “FPI inflows, at $19.182 billion in 2013, accounted for approximately 82 percent of capital importation in 2013”.
Afrinvest analysts further say that if this happens, and coupled with the reduction in the accretion of the foreign reserves, then the risk perception about Nigeria would rise drastically.
“In addition, the reserves ($21.5 billion, assuming it remains at present level) may cover below three months of imports (below global requirement). This would also increase the country risk premium placed on Nigeria, hence an increase in the yields on FGN bonds,” say Afrinvest analysts.
“This increase will raise the cost of borrowing to the government, further snowballing its re-current expenditure (over 65.0 percent in 2014). The country may also find it challenging to raise additional funds through Eurobonds and may be lured to raise the coupon to what is commensurate with perceived risks,” they add.
Samir Gadio, emerging markets analyst at Standard Bank, London, observed that the accumulation of FX reserves in 2012 and early 2013 was a function of increased portfolio inflows which subsequently dried up and even turned negative recently.
Gadio wondered why Nigeria has been unable to rebuild its fiscal buffers despite the robust oil price over the past few years, which appears to reflect a moderate drop in oil output, stressing that possible revenue leakages and prior to this, the fuel subsidy scam, could be responsible.
“On top of the regular budget augmentation disbursements, the ECA funds have also been shared among the three tiers of government to fund ‘people-oriented projects’, but there is little tangible investment to account for,” said Gadio.
Gadio sees this as a serious problem as, according to him, the balance of the ECA declined to a low of USD2.5 billion in January, which is less than 1 percent of GDP (vs a median of 65 percent of GDP among major oil producing countries).
“Should this trend persist,” he added, “Nigeria will remain vulnerable to long-run oil boom and bust cycles, and a potential prolonged decline in the oil price below the USD100 pbl level at some stage in the future would seriously threaten the country’s macroeconomic position.”
Uche Chibuike, a member of the MPC, at the recent committee meeting, observed that recent international developments had already ensured a slowdown in the inflow of such speculative capital.
“Despite this, I find it prudent to continue to express my concern about speculative capital. This is because the vulnerability of the value of our currency in recent times has at least in part been as a consequence of the unstable nature of such speculative FDI. The earlier we begin to discourage such capital flows, the better. While FDI is desirable, it only makes sense when it is invested in the real sectors of our economy,” he said.
Ganiu Garba, also a member of the MPC, at the recent meeting attributed the problem to a non-forward-looking and non-strategic management of oil and gas resources with the consequent inability to sustain inflows of forex revenue to support and sustain some of the economic buffers.
“A strategic and forward-looking management of oil and gas resources is critical to building the forex reserves required to support a stable currency,” Garba said.
– BUSINESS DAY
Nigeria’s economic fortune is benefiting from the Middle East crisis, as the impact of capital inflows from stronger crude oil earnings has seen her foreign reserves climb to record $53.1 billion, beating the $51.04 billion year-end target.
Data available on the Central Bank of Nigeria’s (CBN) website indicated that the reserves closed at $53.1 billion on August 24, which is the highest level in almost 18 years.
Any analyses of the growth shows that the difference in reserves position places the Nigerian economy in good stead, because it can cover over 12 months import.
It is noteworthy that Nigeria’s external reserves fuel the CBN’s capacity to support the local currency and meet external obligations, have continued to rise steadily, since the face-off between the United States and Iran.
Further analysis of the data displayed by the CBN showed that the liquid portion of the external reserves stood at $52.5 billion.
Biztellers reports that Brent crude traded around $87 per barrel, within the week, well above Nigeria’s 2026 federal budget benchmark of $64.85.
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With the Middle East crisis not showing signs of abating, analysts believe the price rebound would largely bolster Nigeria’s fiscal revenues.
The line of thought is popular among those who know, because as a crude oil exporter, Nigeria will continue to earn more petrodollars, which they argue would support the domestic currency – naira’s stability, while pumping the volume of external reserves.
In its economic projections for 2026, the CBN targeted stronger oil earnings, foreign exchange market reforms and improved external capital inflows to achieve the year-end reserves projection.
According to analysts, the current reserves position reinforces the steady growth in Nigeria’s external buffers.
The founder/Chief Executive Officer of the Centre for the Promotion of Public Enterprise (CPPE), Dr Muda Yusuf, earlier hinted at a positive outlook for Nigeria’s external reserves as he does not see anything derailing the forex and fiscal reforms that have brought about stability and improvement in external reserves, as reported by The Nation.
Yusuf said: “Well, the outlook for me is positive because I don’t see anything derailing these forex reforms, fuel subsidy etc. It is these reforms that have brought about stability.”
The CBN data further showed that Nigeria’s external reserves have maintained a steady upward surge in recent months.
The reserves started June at $49.80 billion and crossed the $50 billion mark by June 5, reaching $50.12 billion.
On June 15, reserves had increased further to $50.81 billion before rising to the current position. The reserves stood at $51.9 billion on July 31, and continued.
The sustained increase reflects stronger foreign exchange inflows and improved liquidity conditions in the country’s external sector.
The CBN Governor, Olayemi Cardoso, said: “This strong buffer continues to reinforce investor confidence in the Nigerian economy and support exchange rate stability.”
The CBN’s decision to clear over $7 billion unsettled FX backlogs raised investors’ confidence in the economy, supporting dollar inflows and foreign reserves accretion, Cardoso added.
The CBN boss had explained that although he had no idea where the fund for the backlog clearance would come from, when he assumed office, he believed it was the right thing to do, and gave investors his word.
He said: “Credibility is at the heart of any central bank. If you don’t have credibility, people do not trust you and they do not invest in your economy. When I took office, I made a promise we would pay the backlog, the verifiable backlog of monies that were owed by Nigeria to third parties.
“And it was, at the time, estimated at over $7 billion US dollars. And to be honest with you, I had no idea how I was going to do it, but I just felt it was not something to be negotiated.”
Cardoso explained that Nigeria needed to ensure that its integrity is maintained. Analysts believe the higher reserve level could enhance the CBN’s capacity to support exchange rate stability and meet external obligations.
Up to 30% equity in the upcoming Dangote Refinery in Kenya, has been placed on the table for East African countries, which makes about $1.5 billion worth of the planned project available to regional investors.
David Ndii, Kenyan President William Ruto’s economic adviser, disclosed this on Thursday at a capital markets forum in Nairobi, where he said Kenya would take a 10% stake while Ethiopia and Rwanda had also expressed interest.
Dangote’s planned refinery is expected to be developed in Lamu, a coastal town in southeastern Kenya, though the project was initially proposed for Tanga in Tanzania.
According to the billionaire industrialist, the decision to move the proposed location to Kenya was informed by commercial and technical considerations.
Ndii disclosed that Kenya’s proposed 10% participation would be worth approximately $500 million.
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He said the combined regional participation could amount to about $1.5 billion, with Dangote prepared to support the project if some participating countries are unable to commit as crude off-takers.
“The total for the region is about $1.5 billion,” he said. “I don’t actually see a challenge in doing that, and if some of them are not off-taking we will backstop.”
The proposed regional participation would give East African countries a direct equity interest in a major energy infrastructure project while potentially securing access to refined petroleum products for participating markets.
The United Nations Geoscheme (UNG) for Africa defines Eastern Africa as comprising 18 sovereign countries, alongside two French overseas territories, meaning the proposed 30% allocation could potentially involve a broader regional investor base beyond Kenya, Ethiopia and Rwanda.
The Nigerian authorities have been called upon to focus on strengthening domestic refining capacity.
The Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN) made the call in a communiqué issued at the end of the three-day PENGASSAN Energy and Labour Summit (PEALS 2026).
It stressed the need for adequate protection for refineries operating in the country.
The PENGASSAN said Nigeria must reduce the economic inefficiency of exporting crude oil while importing significant volumes of refined petroleum products by creating an environment that supports domestic refining and other value‑adding activities.
The communiqué, signed by the union President, Festus Osifo, and General Secretary, Jerry Amah, stressed the need to protect refineries, including Dangote Refinery and Waltersmith Refinery.
The association said the expansion would enable Nigeria to retain a greater share of the value generated from its petroleum resources while creating jobs, conserving foreign exchange and stimulating industrial development. PENGASSAN linked the growth to wider opportunities in petrochemicals, gas processing and other downstream activities.
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The communiqué reads in part: “The summit called for sustained policies and investments to expand Nigeria’s domestic refining capacity and reduce the economic inefficiency of exporting crude oil while importing significant volumes of refined petroleum products. The need to protect refineries (such as Dangote Refinery, Waltersmith Refinery, etc.) within Nigeria’s jurisdiction was emphasised.
“Nigeria must progressively retain more value from its petroleum resources through domestic refining, petrochemicals, gas processing and other value‑adding activities capable of generating employment, conserving foreign exchange and stimulating industrial growth.
“Ultimately, the strength of Nigeria’s oil and gas industry will not be measured merely by the resources beneath the ground, but by the projects delivered, the value created, the Nigerian capabilities developed, the decent jobs sustained and the prosperity generated for the Nigerian people.”
The association also warned that abrupt policy changes, overlapping mandates, repetitive approvals and conflicting directives increase the cost of doing business and weaken Nigeria’s competitiveness for global energy capital.
The PENGASSAN called for faster regulatory approvals, digitalised processes and clearer timelines, arguing that the effectiveness of regulation should be measured by its impact on investment, production, government revenue, job creation and national value rather than simply by the number of licences or approvals issued.
On gas, the PENGASSAN advocated an integrated approach to developing Nigeria’s more than 215 trillion cubic feet of proven reserves, including investments in processing facilities, pipelines, storage, LNG, LPG and CNG infrastructure. It said gas should be deployed more aggressively for power generation, manufacturing, transportation, fertiliser and petrochemical production.
The association also urged stronger protection of workers’ rights, occupational safety and employment during mergers, acquisitions, divestments and asset transfers, saying sustainable investment requires skilled and fairly treated workers and that increased production must not come at the expense of workers’ lives and wellbeing.
In addition, the PENGASSAN said the next phase of Nigeria’s petroleum industry must focus on execution with measurable targets and clearly assigned responsibilities to ensure policies translate into projects, production, investment and sustainable employment.
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